**UNITED STATES SECURITIES ANDEXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-KSB**

 

**ý****    ANNUAL REPORT UNDER SECTION 13 OR15(d) OF THE**

**SECURITIES EXCHANGE ACT OF 1934**

 

**For the fiscal year ended December 31, 2002**

 

**File number 001-15801.**

 

**SUREQUEST SYSTEMS, INC.**

(Name of Small Business Issuer in its Charter)

** **

| **NEVADA**                                                      |   | **41-1826635**                       |
|-----------------------------------------------------------------|--------|--------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |   | (I.R.S. Employer Identification No.) |

 

**SUREQUEST SYSTEMS,INC.**

**13606 TI BLVD**

**DALLAS, TEXAS75243-1408**

**(972) 238-7200**

(Address and telephone number of issuer’s principal executive offices)

 

SECURITIES TO BE REGISTERED PURSUANT TOSECTION 12(b) OF THE EXCHANGE ACT:

**None**

 

SECURITIES TO BE REGISTERED PURSUANT TOSECTION 12(g) OF THE EXCHANGE ACT:

 

**COMMON STOCK, PARVALUE $.001 PER SHARE**

(Title of Class)

 

Indicate bycheck mark whether the registrant (1) filed all reports required to be filed bySection 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days. Yes   ý   No    o

 

Check if thereis no disclosure of delinquent filers in response to Item 405 of Regulation S-Bis not contained in this form, and no disclosure will be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-KSB or any amendment tothis form 10-KSB. ý

 

Issuer’srevenue for its most recent fiscal year were $1,203,273.

 

The aggregatemarket value of the voting stock held by non-affiliates computed by referenceto the price at which the stock was sold, or the average bid and asked pricesof such stock, as of December 31, 2002 was approximately $274,496.

 

State thenumber of shares outstanding of each of the issuer’s classes of common equity,as of December 31, 2002: 41,325,686.

 

**DOCUMENTSINCORPORATED BY REFERENCE**

 

There are nodocuments incorporated by reference.

 

 

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SureQuestSystems, Inc.

2003 Form10-K-SB

 

**Table Of Contents**

 
| Part I    |                                                                                    |
|-----------|-----------------------------------------------------------------------------------------|
|      |                                                                                    |
| Item 1.   | Description of Business                                                                 |
|      |                                                                                    |
| Item 2.   | Properties                                                                              |
|      |                                                                                    |
| Item 3.   | Legal Proceedings                                                                       |
|      |                                                                                    |
| Item 4.   | Submission of Matters to a Vote of Security  Holders                                    |
|      |                                                                                    |
| Part II   |                                                                                    |
|      |                                                                                    |
| Item 5.   | Markets and Market Prices                                                               |
|      |                                                                                    |
| Item 6.   | Management's Discussion and Analysis of  Financial Conditions and Results of Operations |
|      |                                                                                    |
| Item 7.   | Financial Statements (See Financial  Section)                                           |
|      |                                                                                    |
| Item 8.   | Changes in and Disagreements with  Accountants on Accounting and Financial Disclosure   |
|      |                                                                                    |
| Part  III |                                                                                    |
|      |                                                                                    |
| Item 9.   | Directors, Executive Officers, Promoters  and Control Persons                           |
|      |                                                                                    |
| Item  10. | Executive Compensation                                                                  |
|      |                                                                                    |
| Item  11. | Security Ownership of Certain Beneficial  Owners and Management of the Company          |
|      |                                                                                    |
| Item  12. | Certain Relationships and Related  Transactions                                         |
|      |                                                                                    |
| Item  13. | Exhibits and Reports on Form 8-K                                                        |
|      |                                                                                    |
| Item  14. | Controls and Procedures                                                                 |

 

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**PART I**

 

**ITEM1. DESCRIPTION OF BUSINESS**

 

SureQuestSystems, Inc. (“SureQuest” or the “Company”) was incorporated under the laws ofthe State of Nevada on August 19, 1941. The Company’s Articles of Incorporationwere amended and restated and filed with the Secretary of State’s office of theState of Nevada on January 5, 2000. The Company’s principal place of businessis 13606 TI Boulevard, Dallas, Texas 75243. SureQuest has an Internet web sitedesignated as www.surequest.com.

 

**HISTORY**

 

On December 4,1996, Rosegold Corporation, a non-operating Nevada corporation, issued12,000,000 shares of its common stock in exchange for all of the issued andoutstanding common shares of SureQuest Systems, Inc., a corporationincorporated under the laws of the State of Texas on March 15, 1991 and changedits name to SureQuest Systems, Inc.

 

Prior to itsmerger with the Rosegold Corporation, SureQuest Systems, Inc. had served thehealthcare industry since 1984 (as a proprietorship until its incorporation in1991) with dietary consulting services, dietary software and “hard copy” menuservices. The Company developed its DOS modular software product in the early1990s and added Microsoft Windows -Registered Trademark- based software throughthe acquisition in June 1998 of the assets of Positive Input, Inc., a Michigancorporation. The assets of Positive Input, Inc. were purchased for $54,629 incash (net of cash assumed), 1,721,050 common shares of the Company and theassumption of approximately $816,000 in debt.

 

The Companyhas incurred losses of $934,458 and $139,806, respectively, for the years endedDecember 31, 2002 and 2001. The Company has financed these losses primarilythrough debt financing provided by certain officers and shareholders of theCompany. Without a significant increase during 2003 in revenues from existingsoftware products and services and products introduced during 2002, the Companymay not be able to continue operations without additional working capitalinvested in the Company.

 

The Company’scurrent financial condition requires the Company’s auditor to issue a “goingconcern” opinion as part of the Company’s presentation of its financialstatements.

 

The Companyhas not been a party to any bankruptcy, receivership or similar proceeding.

 

**THE BUSINESS**

 

SureQuestSystems, Inc. is a provider of dietary and food service management software,menu services and dietary consulting to the institutional food serviceindustry. Since 1984 the Company has focused on developing a client base inhealthcare food service, concentrating on the Long-Term Care (LTC) segment ofthe industry represented by nursing homes and assisted living facilities. TheCompany’s software and other products are also used in other institutionalsettings including hospitals, continuing care retirement communities (“CCRC”),correctional facilities and educational facilities. The Company offers itssoftware product in both a DOS and Windows -Registered Trademark- single userand multi-user operating system format. SureQuest currently servesapproximately 1,060 LTC facilities in 43 states and Canada.

 

The Company’sproprietary software provides food selection and preparation assistance,inventory and personnel cost controls, improved operating efficiencies, andelectronic documentation of the meals prepared and served to a facility’sresidents to reduce liability exposure and ensure compliance with governmentnutritional guidelines.

 

**MARKETING STRATEGY**

 

SureQuest haspenetrated the LTC market through strategic alliances, acquisitions, and directsales. The Company currently has strategic marketing alliances or private labelagreements with the following companies:

 

Food Servicesof America, Inc. – Food Services of America, Inc. (“FSA”), a Seattle,Washington based food distribution company operates primarily in the Northwestand Midwest. It markets a software product called FSA FIRSTLINK -TM-, a privatelabeled version of SureQuest’s proprietary Windows -Registered Trademark- foodservice software application. FSA also provides a “hard copy” menu service forits customers through the Company under the private label SIGNATURE SERIES.

 

Ben E. KeithCompany – The Ben E. Keith Company, located in Fort Worth, Texas is a fooddistributor, which serves the Southwest United States and has been asignificant customer of the Company for over ten years. Ben E. Keith marketsSureQuest products and services under the private label MENUMANAGE -TM-.

 

SYSCO Canada .– (formerly Serca Foodservice, Inc.), located in Toronto, Canada is a fooddistributor, which serves the Canadian market. SYSCO Canada markets SERCASYNERGY -TM-, a private labeled version of SureQuest’s proprietary Windows-Registered Trademark- software application to its institutional customers.Serca Foodservice, Inc. was recently acquired by Sysco Corporation, the largestfood distributor in North America, which changed the name of the company toSYSCO Canada.

 

During 2002,Ben E. Keith, Food Services of America, Inc. and Serca Foodservices, Inc.provided 28%, 20% and 6%, respectively, of the Company’s total gross revenuesand 22%, 30% and 2%, respectively, of gross revenues in 2001.

 

Health Technologies,Inc. – Health Technologies, Inc., located in Maryland Heights, Missouri, is adietary consulting company with over 135 Registered Dietitians, and markets theCompany’s software products to health care facilities and food distributorsunder the private label SMART SOLUTIONS -TM-. Health Technologies also uses theCompany’s software to produce “hard copy” menus for its consulting clients. Anumber of the Registered Dietitians of Health Technologies also serve ascertified trainers of the Company’s software.

 

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**PRODUCTS AND SERVICES**

 

The Company’sprimary products and services include Food Service Management Software, MenuServices and Customer Software Support Services.

 

**FOOD SERVICE MANAGEMENT SOFTWARE**

 

Currently, theCompany offers a suite of Microsoft Windows -Registered Trademark- and DOSbased nutritional software programs designed to allow health care institutions,primarily LTC facilities, hospitals and CCRC’s to more effectively and efficientlyserve their residents. The Company’s software provides solutions in the areasof menu management, inventory control, production management, purchasing andcost control, documentation to reduce liability exposure, and compliance withHealthcare Finance Administration (HFCA), Hazard Analysis Critical ControlPoint (HACCP) and other government nutritional guidelines.

 

Also, theCompany’s software allows LTC facilities to more easily comply with the changesin Federal Government regulations regarding reimbursement of operational costsand the new electronic reporting requirements. Specifically, the Company’ssoftware provides facilities the ability to comply with the FederalGovernment’s PPS (Perspective Payment System) reimbursement guidelines byestablishing a resident’s level of dietary care. A resident is listed as“Clinically Complex”, under the Federal Government’s MDS (Minimum Data Set)regulations, if he or she receives 51% or more of their calories through tubefeeding or 26% of calories and over 500 cc’s of fluid from tube feeding.Additional reimbursement dollars are available to facilities for ClinicallyComplex residents under PPS guidelines. The Company’s software tracks caloricintakes for each resident and provides data to be used for MDS reporting onClinically Complex residents. The Company’s software also provides facilitieswith weight management tracking for each resident for data submission to theFederal Government under MDS regulations. In addition, the Company’s softwarehelps facilities comply with several other nutrition and dietary requirementsunder the following MDS Quality Indicator Domains: #3 Clinical Management; #4Cognitive Functioning; #7 Nutrition and Eating; #8 Physical Functioning; #10Quality of Life and #12 Skin Care.

 

The Windows-Registered Trademark- - based software, Three Squares -Registered Trademark-,establishes nutritionally balanced diets (conforming to governmentrequirements) for the residents in a Long Term Care facility. The diets arethen translated into actual menus containing the proper foods for the threemeals and snacks to be served by the facility for each day. The software canmaintain a menu cycle of 1 to 8 week(s), indicating when particular meals orfood items will be served (for example, the cycle may show that two weeks fromtomorrow, chicken will be served as the main entree). At the end of thescheduled cycle, the entire menu cycle begins again, allowing the Company tocontinue to know what foods will be served in the future. Institutions typicallyserve “warming” foods during the Fall/Winter cycle and lighter, “cooling” foodsduring the Spring/Summer cycle, hence two menu cycles per year. The foods canalso be tailored to different geographic regions of the country. The softwaremaintains a list of more than 50 separate nutrients for each meal item served,such that the facility’s dietitian or administrator may access and report thenumber of calories, grams of fat, milligrams of vitamin C that an individualresident consumed for a meal, a day, a week, or any other time period. Thesoftware also tracks the weight of each resident in the facility.

 

Anotherimportant element of the software is its ability to track each resident’slikes/dislikes, allergies and other health related conditions requiring specialdiets. The software currently supports 99 special diet types such aslow-calorie, diabetic or cardiac. More importantly, during meal preparation andproduction, the software automatically determines the types and quantities offood to be produced based on the resident population profiles and then printsout individual tray tickets that alert kitchen personnel as to the specificitems that should be placed on each tray. In management’s opinion, theCompany’s software is compliant with the Hazard Analysis Critical Control Point(HACCP) program guidelines, as incorporated in the U.S. Food Code.

 

During 2001,the Company completed its introduction of three new products (which are updatedversions of existing products) to enhance its suite of Windows based softwaresolutions for healthcare and other institutional foodservice environments.Three Squares -Registered Trademark-, Version 4.0, was introduced and allowsclients the ability to operate in either single user or multi user environmentsusing 32-bit architecture. The new Version 4.0 also incorporates severaladditional enhancements to improve productivity at client facilities. Thesecond new product introduced was the Three Squares Centralized ManagementSystem (CMS) to allow corporate/chain clients the ability to control menu andrecipe data from a centralized office and then upload the menus and data totheir individual facility sites. With centralized management controlcapabilities, the CMS product is presently installed and in use by corporate clients.In addition to these two products, the Company introduced its Square 1 -TM-product that is essentially a “slimmed down” version of the Company’s ThreeSquares software product. Square 1 provides essential functionality tofacilities at lower costs and can be easily upgraded to the more comprehensiveThree Squares program, as the facilities’ requirements increase. During thefirst quarter of 2003, the Company introduced its Three Squares - RegisteredTrademark, Version 4.1 that expanded and enhanced functionality of thesoftware, including the import-export and inventory functions and also allowedfor multi-data base access.

 

The Companyoffers software products that are compatible with two of the popular computeroperating systems: Microsoft’s Windows -Registered Trademark- and DOS. TheCompany believes that its software programs can be readily adapted to anychanges in the aforementioned operating systems or to new operating systemswithout significant cost. Any such changes or updates would be accomplished bystaff personnel or by outside independent contractors depending on thecomplexity of the change or update.  Asignificant number of customers have upgraded the DOS to the Windows versionand the percentage of annual revenue from the DOS product as compared to totalrevenues continues to decrease each year.

 

**MENU SERVICES**

 

The Federalgovernment regulations require that LTC facilities use a Registered Dietitian,on either a full time, part time or by consulting contract, to review the menusand nutritional programs for the LTC residents. Certain State governmentsrequire that each LTC facility in their state demonstrate a minimum number ofdietitian hours to plan and assess the nutritional needs of the LTC residents.For the facilities that cannot afford paying for additional hours for thesedietitians to develop nutritionally adequate menus, the Company has a “hardcopy” menu service program that meets the government requirements. This serviceprovides menu planning, nutritional analyses, production recipe books,spreadsheets and posting menus. Approximately 300 facilities are using theCompany’s “hard copy” menu service business throughout the US and the number offacilities using this service is expected to reach approximately 600 during2003.

 

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The Company’sstaff prepares each menu with attention to every detail of color, texture, andshape of individual foods to enhance the visual appearance of the meal. Mealsare analyzed for nutrient content and compared to the Recommended DailyAllowances, as established by the National Academy of Sciences. Menus arecertified by either the facility’s registered dietitians or by one of theCompany’s registered dietitians with respect to meeting the nutritionalrequirements and standards specified by the facility. Scaled, quantity recipesincluded with the menu services are intended to be compliant with the HazardAnalysis Critical Control Point (HACCP) program guidelines, as incorporatedinto the US Food Code.

 

**CUSTOMER SOFTWARE SUPPORT SERVICES**

 

The Companyprovides the following support to its customers:

 

CustomerSupport Center. The Company provides customer software support at severallevels, from answering user questions on the implementation of the Company’ssoftware to technical questions on the database and software performance.Services are provided 24 hours per day/7 days per week via toll free telephonenumber or through the Internet using the Company’s Internet Training andSupport Program. The internet access service was introduced in early 2002 andhas significantly added to the effectiveness of the support function.

 

StrategicAlliance Training Program. The Company has developed a “train the trainer”program that trains strategic alliance personnel capable of training end userson the use of its dietary software. Health Technologies, Inc., one of theCompany’s strategic marketing partners, participates in this program. FoodService of America, Sysco Canada and Best Foods, Inc. are also participating inthis training program, which allows the Company to support its planned growthin software sales without significantly increasing training costs.

 

InternetTraining and Support Program. In early 2002, the Company introduced its newInternet Training and Support Program designed to offer client training andsupport using Internet based technology. This technology allows the Company toprovide greater training and support capabilities for its clients. It alsoassists in managing the continuous training and support of new personnel due tothe high turnover rates with healthcare food service staff. In addition, theCompany’s sales personnel use this technology to provide real-time, liveproduct demonstrations via the Internet to prospective clients. Utilizing thistechnology in the sales process saves valuable time and sales travel relatedexpenses.  The Company has experienced areduction in the overall sales cycle.

 

**FUTURE EXPANSION PLANS**

 

The Companycontinues to develop plans, and is in the process of attempting to raisecapital, to significantly increase revenue and net income by transforming thecompany into a knowledge and information based company using technology(particularly, the internet) to pursue new, but related, markets. Thisstrategic plan is intended to (i) increase current target market share; (ii)expand the Company’s target markets; and (iii) vertically integrate with supplychain partners. Part of this strategy will allow the Company’s customers toelectronically access menus and menu data, using the Internet, to moreefficiently manage their food service operations. Due to the disappointing 2002operating results, implementation of this strategy is tabled until sufficientworking capital is secured to stabilize current operations. The Company isexploring other product segments that are compatible with its core market baseto significantly increase revenues with projected profitability. Absentadditional capital, the Company will continue to expand its current productsegments with its alliance partners.

 

**PRICING STRATEGY**

 

The Companyoffers a flexible pricing strategy to meet the financial requirements of abroad range of clients. To facilitate this strategy, products and servicesprovided by the Company are offered to clients either through purchasecontracts, lease agreements or monthly rental programs. The Company’s pricingstrategy is designed to effectively penetrate targeted markets with affordablesolutions that bring premium value to its clients and accelerate revenue growthand profitability for the Company.  Thelong term care industry’s financial health has been particularly impaired dueto the economic downturn. However, there appears to be improvement andtechnology solutions that result in lower operating costs due to improved efficienciesare especially important for survival to the long term care industry.

 

The Companyreceives license fees for its software, maintenance and support fees forsoftware licenses, software training fees, menu service bureau fees andrevenues for the sale of paper products to its clients.

 

Size ofMarkets Served. The U.S. population is rapidly aging and the over-65 group isexpected to double by the year 2030. LTC facilities will grow, over time, tomeet the demand of this demographic trend and will require use of dietarysoftware to operate efficiently. The fastest growing market serving the agingpopulation is Assisted Living facilities. At present, it is estimated that only20-25% of the LTC facilities in the U.S. use dietary software.

 

The followingchart sets forth the approximate number of facilities in the United States:

 
| **PRIMARY MARKETS SERVED** |   | **# OF FACILITIES** |   |
|----------------------------|--------|---------------------|--------|
|                       |   |                |   |
| Nursing Homes              |   | 17,023              | (1)    |
| Assisted Living Facilities |   | 25,377              | (2)    |
| Hospitals                  |   | 5,810               | (3)    |
| Total                      |   | 48,210              |   |

 

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(1) HCFA -OSCAR Form 672: F78-F93, current surveys as of September 2000.

 

(2) NationalCenter for Assisted Living, 1998 Facts and Trends: The Assisted LivingSourcebook 1998.

 

(3) December31, 2000, American Hospital Association Total Number of All U.S. RegisteredHospitals.

 

The abovemarkets do not include other institutional markets into which the Company plansto expand in the future, to include additional correctional facilities,educational facilities, business and industry and Government institutions, toinclude the Veterans Administration (“VA”) and the military.

 

**COMPETITION**

 

Severalcompeting software companies have dietary software that target the healthcareindustry, including the LTC market. Primary competitors are GeriMenu located inYork, Pennsylvania, which management believes is now owned by C-Bord; a dietarysoftware company; Computrition located in Chatsworth, California; and C-Bordlocated in Ithaca, New York. The Company’s best estimate is that only 20-25% ofthe kitchen operations in LTC facilities have dietary software in order to maketheir operations more efficient and cost effective. The Company believes thatbecause of the effect of the Prospective Payment System there is now a muchgreater demand for dietary software in the LTC industry and that there will bea faster penetration in the future of the remaining 75-80% of the market whichis not computerized. Of the approximately 20-25% of the market which iscomputerized, the Company’s best estimate is that the Company has approximately20% of this penetrated market and GeriMenu, the Company’s primary competition,has approximately 20%. The Company does not have sufficient information toevaluate the market shares of Computrition or C-Bord (outside of GeriMenu).There are other software companies including Data Control, Diet Master, DFM,FMG Software Systems, HyperGen, NutriMax, Nutri-Net, Reliable and UniSoftserving the dietary market, but to the best estimate of the Company, none has asignificant market share in the LTC market segment.

 

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**PATENTS, TRADEMARKS, SERVICE MARKS, LICENSES**

 

The Companyhas a copyright and a registered trademark for its Windows -RegisteredTrademark- based software product, Three Squares. In addition, the Company hasreceived a registration for the trademark: Technology that Feeds America-Registered Trademark-. The Company also is in the process of applying for atrademark for its Square 1 -TM- product. The Company has developed othersoftware products including SurePref -TM- which tracks a resident’s foodpreference and SureWeight -TM- which tracks the weight gain and loss of eachresident in a facility. The Company treats these products as proprietary and astrade secrets.

 

Should theCompany develop a web-enabled software application, management plans to retainthe services of an expert in intellectual property rights to advise the Companyon what aspects of its development can be protected for intellectual propertyrights and what is necessary to obtain that protection.

 

**EFFECT OF GOVERNMENTAL REGULATIONS ON THEBUSINESS**

 

There are nogovernmental regulations affecting the conduct of the Company’s business otherthan the normal and usual governmental regulations affecting all businesses.The primary market for the Company’s services is the LTC industry, which is ahighly regulated industry. Therefore, the Company’s customers are subject tonumerous governmental regulations, including Medicare and Medicaid, whichdirectly affect the facilities’ ability to pay the costs of the Company’sproducts and services.

 

Fixed RateMedicare/Medicaid Reimbursements. The Balanced Budget Act of 1997 adopted acompletely new and unique reimbursement system for payment for servicesrendered by nursing facilities and other healthcare providers to Medicarepatients. As of July 1, 1998 and thereafter, all healthcare providers will bepaid for services rendered to Medicare patients in accordance with theProspective Payment System (PPS). Prior to that date, services provided toMedicare patients were paid pursuant to a cost-based reimbursement system.

 

The PPSreimbursement system is price-based. The prices are set in advance by theHealth Care Financing Administration (HCFA), the government agency responsiblefor administration of Medicare. Under PPS the per diem rate paid to thehealthcare provider is all the provider receives, there are no settlements oradjustments. And the costs incurred by the healthcare provider do not in anyway impact the price HCFA is willing to pay for the services being provided toMedicare patients.

 

The practicalimpact of this change in the Medicare reimbursement system is that thehealthcare providers are being paid substantially less per diem for eachMedicare patient and that all healthcare services provided to that patient(i.e., direct care, indirect care, and all ancillary care) must be paid fromthat substantially reduced per diem PPS reimbursement from Medicare. Under theprevious cost-based reimbursement system, the healthcare provider was paid foreach component of care, direct care, indirect care and ancillaries, at costplus a percentage increase. Under the cost-based system, the amount reimbursedby Medicare would increase or decrease based upon the actual costs incurred byeach healthcare provider. These increases and decreases applied to both directcare and ancillary care providers.

 

Under the PPSreimbursement system the healthcare provider is paid one per diem price perpatient. The per diem reimbursement prices paid by HCFA are established by areimbursement formula that is based upon a government study of patient acuitylevels. All patient care, including direct care and ancillary care, must bepaid from that per diem price. The per diem reimbursement under PPS for allhealthcare providers is less than most healthcare providers previously receivedon a per diem basis under the cost-based Medicare reimbursement system. And allhealthcare providers (i.e., the nursing facility and all ancillary providers —radiology, pharmacy, lab, medical supplies, therapy, etc.) that providehealthcare services to a Medicare patient must be paid from that smaller perpatient per diem reimbursement. In essence, the Medicare reimbursement moniesbecame significantly smaller, and all healthcare providers must now share inthat smaller amount of reimbursement monies.

 

As a result ofthis Medicare reimbursement system, all healthcare providers that providehealthcare services to Medicare patients are doing everything possible to reducethe costs of their operations. This situation provides an opportunity forSureQuest. The dietary software sold by SureQuest can create significantsavings for its users.

 

The savingsgenerated by use of the SureQuest software occurs in both the dietary departmentand the nursing department of each facility. The savings are generated byreductions in food and food preparation costs, food usage, dietary hours andnursing hours.

 

OtherHealthcare Reimbursement Programs. Other sources of reimbursement available tohealthcare providers include Medicaid, private insurance, HMOs, VeteransAdministration (“VA”) and private pay. Medicaid is a federally funded, stateadministered health insurance program for low-income individuals. Since theprogram is state administered, it varies from state to state. However, therehave been no significant changes in the Medicaid program in recent years. Andbecause the Medicaid program is the largest healthcare reimbursement program interms of dollars reimbursed, the lack of significant changes in the program hascreated stability for those healthcare providers that are primarily dependentupon Medicaid reimbursement.

 

Otherreimbursement programs, including private insurance, HMOs, VA and private pay,have experienced few significant changes in recent years. Private pay residentspay what the LTC facilities normally charge. Private insurance, HMO’s and theVA are still cost-based payers, but, to one extent or another, these programsare evaluating changing their reimbursement to a per diem price per patientsimilar to Medicare. Because these programs are still cost based, residentswhose needs are reimbursed by such programs are highly sought after. As aresult, a significant amount of marketing effort is expended to attract theseresidents to a LTC facility. The nutritional program (menus and diets) is animportant part of these marketing efforts. Therefore, the Company’s softwareand menu services products add value to these marketing efforts and the Companyuses the “value added” feature to increase its sales to LTC facilities.

 

In 1996, theHealth Insurance Portability and Accountability Act of 1996 (HIPPA) becameeffective and final rules implementing the HIPPA Act were released by theDepartment of Health and Human Services (DHHS) on February 13, 2003. TheCompany is evaluating the extent to which the HIPPA rules apply to theCompany’s business and then, after such evaluation, the Company will take anyand all necessary actions to be in full compliance with the new rules. The Companydoes not expect that any such compliance would have any significant adverseimpact on the Company’s business or how it does its business.

 

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**AMOUNT SPENT ON RESEARCH AND DEVELOPMENT**

 

**PRODUCT DEVELOPMENT**

 

Over the lastfour years, the Company has devoted resources to significantly improve andincrease features and functionality of its Windows -Registered Trademark- basedsoftware products. During the fourth quarter of 2002, the major components ofthese improvements have been completed. These improved features allow theCompany to expand its market penetration in other institutional food serviceenvironments, including hospitals, continuing care retirement communities,assisted living facilities and correctional facilities. The Company’s 16-bitversion of the Window -Registered Trademark- software runs under Microsoft’solder operating system, Windows -Registered Trademark- 3.1 and limits access tothe program to one user at a time. In 2002, the Company finalized developmentof its new 32-bit Version of its Three Squares Program (Version 4.1) which isdesigned to run under Microsoft’s newer operating systems, Windows -RegisteredTrademark- 95/98, 2000 and XP and Windows -Registered Trademark- NT with the resultthat it is “multiple user” meaning that multiple users can access the programsimultaneously. The availability of Version 4.1 also will allow the Company toconvert its Menu Service Bureau to its new Windows -Registered Trademark-system creating significant increases in productivity from the faster program.This process continues to be developed and the Company plans to complete thisconversion during 2003.

 

The Companyalso released a 32-bit upgrade to its existing Export/Import utilityapplication in 2000 and made additional enhancements in 2002. This utility is acompanion to its core Windows system that allows corporate customers tocentrally create menu data bases and send (export) them to all their facilitylocations. Using this utility, management believes corporate clients will beable to maintain control over program functions with corporate or regionalmanagement determining what functions their facilities will be able to performon a day to day basis and what functions will be retained by the central homeoffice. The Company believes that through its current and upgradedExport/Import utility application, corporate clients are able to limitliability risks by having greater standardization among all of its facilitiesand are better equipped to provide greater quality assurance in their dietaryprograms. As a result, the Company believes that this Export/Import utilityapplication will provide highly desirable dining service solutions for largechains and other corporate clients and increase the Company’s penetration inthat market sector. The new 32-bit Export/Import utility allows corporate/chainclients the ability to manage menu and recipe data from a centralized officeand then upload this information to facilities in various different locations.

 

As a result ofthe Company’s development efforts, the Company incurred to third parties$22,400 and $7,420 for research and development in 2002 and 2001, respectively.In addition, during 2002 the Company allocated approximately $16,000 of direct laborcosts to research and development efforts.

 

**EMPLOYEES**

 

The Companyhas 13 full-time employees and 2 part-time employees and retains specialists asconsultants in various fields of expertise.

 

**ENVIRONMENTAL COMPLIANCE**

 

As a softwareCompany, SureQuest has not had to spend any material amounts of capital or timein compliance with any federal, state or local environmental laws and is notaware of any failures in compliance.

 

**ITEM 2. PROPERTIES**

 

The Companyoperates from a single location at its****headquarters located in Dallas, Texaswhere it leases approximately 8,300 square feet comprising the entire one-storybuilding located at 13606 TI Boulevard. The lease is a five-year lease, whichexpires May 30, 2003 with a base monthly rental of $5,539. The Company spentthe sum of $63,849 in 2002 and $66,036 in 2001 associated with this lease. TheCompany has a right of first refusal on the sale of the building. During thefirst quarter of 2003, the lessee has offered to extend lease terms for anadditional five years at the current lease rate.

 

The Companysubleases approximately 2,000 square feet of its office space to a nonaffiliated lessee. Terms are $750 per month with a lease term expiring on May30, 2003.

 

The Companyowns approximately 31.83 acres of vacant farmland in rural southern DallasCounty near Wilmer, Texas. The land was acquired by the Company in 1998 inreturn for 500,000 shares of the Company’s common stock. The property wasappraised in 1998 at a market value of $378,903 against which the Companyborrowed the sum of $125,000 from a Texas national bank using the land tosecure the promissory note. As of December 31, 2002, the Company owed a balanceof $87,500 on the aforementioned note. The Company currently has no plans forthe farmland other than seeking a potential buyer and does not receive anymaterial rental or material income from the land. The land is not material tothe Company’s operations nor does the Company currently plan to develop a realestate investment business in the future. During the year 2000 and again during2002, the Company determined that there was a permanent impairment in the fairmarket value of the property. Accordingly, the Company recognized a $127,300impairment during 2002 and a $101,603 unrealized loss during 2000 and decreasedits carrying value by these same amounts. The Company values the land atDecember 31, 2002 at $150,000 that is projected to be the sale proceeds net ofbroker commissions. The Company is actively attempting to sell the property butcannot determine when and if such a sale will be realized.

 

**ITEM 3****. LEGALPROCEEDINGS**

 

There are nomaterial legal proceedings pending against the Company.

 

**ITEM 4****. SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

There were nomatters submitted to security holders during the year ended December 31, 2002

 

8

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**PART II**

 

**ITEM 5****. MARKET ANDMARKET PRICES**

 

The principalexchange where the common stock of the Company trades is the NASDAQ OTC:BB. Thehigh and low sales prices for each quarter during the last two years are asfollows:

 
| **QUARTER ENDED** |   | **HIGH** |   | **LOW** |   |
|-------------------|--------|----------|--------|---------|--------|
|              |   |     |   |    |   |
| March, 2001       |   | 0.05     |   | 0.02    |   |
| June, 2001        |   | 0.05     |   | 0.03    |   |
| September, 2001   |   | 0.03     |   | 0.02    |   |
| December, 2001    |   | 0.03     |   | 0.02    |   |
| March, 2002       |   | 0.27     |   | 0.02    |   |
| June, 2002        |   | 0.19     |   | 0.05    |   |
| September, 2002   |   | 0.08     |   | 0.02    |   |
| December, 2002    |   | 0.03     |   | 0.01    |   |

 

The abovequotations are inter-dealer quotations without retail mark-up, mark-down orcommission and may not represent actual transactions.

 

**HOLDERS**

 

The number ofstockholders of record of the Company’s common stock, the only stockoutstanding, as of December 31, 2002 was 2,070.

 

**ITEM 6****.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OFOPERATIONS**

 

**BACKGROUND**

 

SureQuestSystems, Inc. believes that it is uniquely positioned in its industry becauseof its proprietary software technology that provides nutrition managementsystems and services to food service institutions in 43 US states and Canada.Recognizing that there will continue to be significant opportunities innutrition delivery systems, the Company developed, during the year 2001, astrategic plan to increase revenues and become profitable by transforming theCompany into a knowledge and information based Company, providing electronic(Internet) access to its products and services. Web-enabling the most commonfeatures of our proprietary dietary software will provide to our customers: 1)user installed and self paced instruction; 2) reduced complexity; 3) alldatabase information and programs maintained by SureQuest Systems, Inc. and, 4)introduction of a low priced monthly service and fee arrangement. And after thecompletion of this electronic development phase, the Company plans to evolve asa provider of nutrition based information to the consumer. Concurrently, theCompany continues to attempt to expand its present product and servicesdelivery system, including the introduction during late 2000 of its multi-userversion of its software and a low cost menu module so that its products andservices will be affordable to the entire industry. In 2002 and 2001, thesenewly introduced products did not have a meaningful contribution to theCompany’s revenues, but Management anticipates that the products will besuccessful in the growth of the Company’s revenues.

 

The CMSproduct, developed by SureQuest during 2000 and introduced during 2001, allowscorporate clients the ability to manage their menus, recipes and coordinatefood purchasing from a centralized or corporate position. The producteliminates repetitive menu and recipe data management tasks at multiplefacilities and streamlines this process for corporate [chain] clients and forfood distributors. In addition, the CMS technology allows clients theopportunity to accumulate food purchasing data and use this technology toprovide significant benefits and savings for multiple facility operations.Management believes that the new contracts for the CMS product technology,secured in 2001 and 2002, confirms the value of the CMS product and believes itwill have success in placing its CMS product technology with other nursing homechains and food service management contract companies and food distributorsduring 2003 and beyond.

 

In order tosuccessfully implement the entire business plan strategy the Company continuesin its attempt to obtain capital financing. THERE CAN BE NO ASSURANCE THAT ANINVESTMENT COMMITMENT WILL BE REALIZED. In addition, the Company’s financialcondition, working capital deficit, outstanding payroll tax obligations andresultant low market cap, all combine to deter investment. The Company mustincrease revenues and improve operating results to attract investment andsustain operations.

 

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The year 2002was disappointing in terms of revenues and operating loss.  Revenues must significantly improve during2003 or the Company has no alternative but to consider reductions in Managementlevel personnel as well as other options. Existing line personnel are essentialto continuing to support the Company’s products and services and no reductionsare projected. While the Company will continue to support its existing productsand services, additional development or enhancement of existing products andservices may be deferred because of lack of capital. There can be no assurancethat the quality of the products and services provided to its customers willnot be impaired if improvement in operating results is not realized.

 

During thefirst quarter of 2003, the Company reorganized its marketing personnel to anincentive based compensation program and a new marketing director was assigned.Management believes that this reorganization will provide an increase inrevenues through existing and proposed new distribution channels whiledecreasing the ratio of direct marketing expenses to revenues.  During the first quarter of 2003, theCompany completed a significant transaction that was in development during theyear 2002, and announced that it has entered into a five year agreement toprovide software, menu services, training and customer support for a majornursing home chain with over 250 facilities. During the year 2001, the Company realized $275,000 private license feesfrom one of its major distributors. This 2001 sales event was not repeated during2002 and as a result, 2002 revenues were approximately 24% below the 2001 yearlevel. There can be no assurance that the Company will, in the future, realizeadditional lump sum revenues. Additionally, existing marketing distributionchannels may not be maintained and these channels may not continue to sustainrevenue growth similar to or in excess of prior years or that new saleschannels will be procured. Because the majority of Company revenues areconcentrated (54% and 54% in the years 2002 and 2001, respectively) with threedistribution channels, the marketing disruption of any one or more of thesethree channels would have a significant negative impact on maintainingsufficient revenues to achieve profitability. These financial conditions, lackof liquidity and other uncertainties require the Company’s auditor to continueto issue a “going concern” opinion as part of the presentation of the Company’sfinancial statements.

 

Although theCompany had significantly increased its operating loss in 2002 as compared to2001 from $139,086 in 2001 to $934,458 in 2002, and that the Company hasincurred significant losses during each of the past six years, and as ofDecember 31, 2002, has an accumulated deficit of approximately $7.9 million,Management remains optimistic that these negative trends will reverse. Ofsignificance is that despite the significant increase in operating loss during2002 as compared to 2001, the net cash used in operations only increased from$14,856 during the year ended December 31,2001 to $81,914 in 2002. This wasprimarily due to the increase of non cash charges to operations during 2002from common stock issuances and the unrealized loss provision for the land heldfor sale.

 

Managementprojects that the first quarter 2003 revenues will be equal to or exceed thoseof the same period in 2002.  Inaddition, during the first quarter of 2003, the Company has received a softwarepurchase commitment and deposit from a significant multi-facility long termcare company and this revenue should be recognized during the second quarter of2003. In addition, this commitment will provide additional revenues from thelicense commitment and hard copy menu services to each of the facilities.

 

Among theCompany’s liabilities at December 31, 2002 and 2001 is an obligation to theInternal Revenue Service for unpaid employee payroll withholding taxes for theyears 1998 and 1999 and the first quarter of 2000. As of January 12, 2001, theDepartment of Treasury notified the Company that the total obligation,including penalty and interest, was $720,975. During 2000, the Company enteredinto a scheduled monthly payment agreement with the Internal Revenue Servicethat included the payment of certain lump sum installments during the years2001 and 2002. As of December 31, 2001, the Company had remitted $165,000 aspayments under this settlement agreement and continued to remit $5,000 monthlypayment installments. On September 20, 2001, the Company submitted to theDepartment of Treasury an offer in compromise of $300,000 payable in twentyfour monthly installments of $12,500 as a proposed settlement of the entireobligation based on the financial impairment of the Company and the installmentagreement was terminated. There can be no assurance that the Internal RevenueService will accept this offer, although Management is confident that an amountwill be compromised that will be significantly lower than the obligationrecorded at December 31, 2002. In the event of rejection, the Internal RevenueService may elect to demand payment of the remaining obligation or request areinstatement of a modified settlement agreement. In the opinion of Management,the Company may not be in a financial position to comply with this demand andwould have to significantly reduce services that in turn may significantlyreduce future revenues and impair existing marketing relationships. During thefirst quarter of 2003, the Internal Revenue Service completed its fieldvaluation of the Company’s assets and liabilities, and a notice from theDepartment of Treasury regarding determination of the offer in compromise isanticipated by the Company during the second quarter of 2003. In addition, theCompany has not remitted payroll tax deposits of $34,220 related to the thirdand fourth quarters of 2002 that is recorded at December 31, 2002 in additionto the amount subject to the offer in compromise.  In order for the Company to be eligible for the offer incompromise, it must be current with all payroll tax obligations subsequent tothe first quarter of 2000. Although the Company intends to remit these depositsto remain eligible, there can be no assurance that the Company will be able todo so.

 

Due to theCompany’s limited access to capital, negative worth, continuing operatingdeficits, and the downturn in economic indicators, there can be no assurancegiven that the Company will achieve or maintain profitability or generatesufficient cash in future periods to sustain its business. This future must beconsidered given in light of the risks frequently encountered by companieshaving similar negative working capital and limited financial resources. Toaddress these risks, Management must maintain sufficient liquidity toeffectively manage the Company’s working capital to fund operations, continueto enhance existing products and services, maintain existing and develop newmarketing relationships, implement and successfully execute the business andmarketing strategy, develop new strategic alliances, provide superior customerservice, respond to competitive developments, and retain, motivate and acquirequalified personnel.

 

The Companyhas a significant amount of debt outstanding and may need to access additionaldebt financing to restructure the timing of its required principal and interestpayments. At December 31, 2002, the Company had $1,329,916 of current and longterm debt obligations, primarily to officers, shareholders and affiliates.While this related party debt provides for a certain flexibility inrestructuring payments when required, there can be no assurance that theserelated parties will continue to renegotiate terms. The total level of debtcould impair the Company’s ability to obtain additional financing, require theCompany to dedicate a substantial portion of its cash flow from operations tothe payment of principal and interest, impair our ability to react rapidly to achange in market conditions and make the Company more vulnerable if there is acontinued downturn in general economic conditions.

 

There can beno assurance that Management will be successful in remedying these risks andthe failure to do so would have a further material adverse effect on ourbusiness, financial condition and results of operations. Sales and operatingresults generally depend on the volume and timing of orders received, which aredifficult to forecast given the length of the sales cycle in the assistedliving and nursing care industry due to current constrained federal and statereimbursement policies and the continued reliance by the industry on manualsystems. Accordingly, any significant shortfall in sales or collections wouldhave an immediate adverse effect on the Company’s business, financial conditionand results of operations.

 

On January 24,2003, the Company Board of Directors adopted a resolution to authorize acorporate restructuring, including moving its state of incorporation fromNevada to Delaware. The Board determined that this restructuring is in the bestinterests of the Company and its shareholders. A preliminary draft of the 14C InformationStatement describing the transaction has been filed on March 3, 2003 with theSecurities and Exchange Commission. The restructuring contemplates, among otherthings, the issuance of a Series A Convertible Preferred Stock convertible intoDelaware common stock, the right of the shareholders not receiving the Series AConvertible Preferred Stock to receive one share of Delaware common stock foreach forty shares of Nevada common stock and the adoption of a 2003 Directors,Officers and Consultants stock option, stock warrant and stock award plan. Itis contemplated, upon completion of the restructuring, that the Company willenter into consulting agreements providing for the issuance of approximately6,750,000 shares of registered common stock and warrants to acquire 2,500,000shares of registered common stock at exercise prices ranging from $.002 to$.50. If all of these warrants are exercised, the Company will receiveapproximately $500,000 of invested capital for its corporate purposes.

 

**RESULTS OF OPERATIONS**

 

**TOTAL REVENUES**

 

Revenues forthe year ended December 31, 2002 were $1,203,273 that represents a decrease of$385,209 (24.3%) from revenues of $1,588,482 for the year ended December 31,2001. Dietary services and supplies revenues decreased to $567,865 for the yearended December 31, 2002 from $592,760 for the year ended December 31, 2001which represents a 4.2% decrease. Software sales and rental revenues decreasedto $635,408 for the year ended December 31, 2002 from $995,722 for the year endedDecember 31, 2001 which represents a 36.2% decrease.

 

Dietaryservices and supplies revenues decreased $24,895 for the year ended December31, 2002 over the same period in the prior year due to a decrease of hard copymenu services of $9,223, a reduction of $4,142 in data entry services and a$11,530 reduction in revenues from menus and forms. The Company projects thatdietary services and supplies revenues will increase during the year 2003 dueto a new multi-facility hard copy menu service customer.  The software sales and rental revenuessignificantly decreased during the year ended December 31, 2002 by $360,314from the same twelve month period in 2001 primarily because there were $275,000in private license bulk purchases by one food distributor in 2001. In additionduring 2002 DOS revenues decreased $8,618, fees related to program servicesdecreased $31,300, direct software sales decreased by $90,209 offset by anincrease in support revenues of $51,317 over the same twelve month periodduring 2001. The Company believes that direct software sales during 2003 willreturn to 2001 sales levels but, however, bulk license revenues may not berealized during 2003.

 

10

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**COST OF REVENUES**

 

Total cost ofrevenues decreased to $674,070 for the year ended December 31, 2002 whichrepresents a 4.0% decrease over cost of revenues of $702,272 for the year endedDecember 31, 2001. 2001 software sales and rental cost of revenues of $196,518,as originally reported at December 31, 2001, increased to $490,103 due to a$293,585 reclassification of software amortization from an operating expense tosoftware sales and rental cost of revenues. The Company’s gross profit of$529,203 (44.0% gross profit margin) for the year ended December 31, 2002 is a11.8% gross profit margin decrease over the gross profit of $886,210 (55.8%gross profit margin) during the year ended December 31, 2001.

 

Dietaryservices and supplies cost of revenues for the year ended December 31, 2002 of$199,533 decreased from $212,169 for the year ended December 31, 2001 whichrepresents a 6.0% decrease. Software sales and rental cost of revenues for theyear ended December 31, 2002 of $474,537 decreased 3.2% from $490,103 duringthe year ended December 31, 2001. The gross profit margin of dietary servicesand supplies of $368,332 and gross profit margin of 64.9% during the year endedDecember 31, 2002 decreased from $380,591 and gross profit margin of 64.2%during the year ended December 31, 2001. The gross profit margin of softwaresales and rental of $160,871 and gross profit margin of 25.3% for the yearended December 31, 2002 decreased from $505,619 and gross profit margin of50.8% during the year ended December 31, 2001.

 

The dietaryservices and supplies cost of revenues decrease of $12,636 during the yearended December 31, 2002 from the same period during 2001 is primarilyattributable to a reduction of $11,975 in the use of consulting dietitians. Thesoftware sales and rental cost of revenues decrease during the year endedDecember 31, 2002 of $15,566 from the same period during 2001 is primarilyattributable to the elimination of one support person during the fourth quarterof 2002, an increase during 2002 in programming costs of $14,980 and areclassification of a salary related to one person from software sales andrental in 2001 to dietary services and supplies during 2002. The gross profitmargin related to software sales and rental decreased from 50.8% during 2001 to25.3% during 2002 due to 2001 bulk license revenues of $275,000 that haveminimal cost of revenues associated with those sales.

 

**SALES AND MARKETING EXPENSES**

 

For the yearended December 31, 2001, sales and marketing expenses were $53,917 or 4.5% ofrevenue, a decrease from $69,740 or 4.4% of revenue for the year ended December31, 2001. The net decrease of $15,823 in expense during the year ended December31, 2002 is primarily due to an approximate reduction of $10,090 in trade showexpense due to the Company’s participation in one trade show during 2002compared to two during 2001, a $2,377 reduction in marketing salaries and areduction in direct advertising of $2,196. During the year 2002, the Companyacquired the services of an Internet communication company that allows forsales presentations interfaces of our products and services directly on line,thereby eliminating the necessity of travel to the customer location. TheCompany’s primary marketing representatives are network alliance relationships,primarily in the food service industry, thereby the Company does not requiresignificant marketing staffing.

 

**GENERAL AND ADMINISTRATIVE EXPENSES**

 

For the yearended December 31, 2002, general and administrative expenses were $1,141,346 or94.9% of revenue, an increase from $800,562 or 50.4% of revenue for the yearended December 31, 2001. The Company increased its general and administrativeexpenses $340,784 during the year 2002 primarily due to $309,766 expensesrelated to public relation activities. Of this $309,766 expense, $108,000 was acash expenditure and the remaining $201,766 expense was stock compensation forservices.  The remaining $31,018increase during 2002 was related to a $31,050 credit issued during 2001 to theCompany for prior research and development programming services. Significantother increases during 2002 as compared to 2001 are as follows: travel costs of$7,386 primarily related to working with promotion services , outsideprofessional services of $6,279, equipment repairs of $2,322, cleaning servicesof $5,365, audit services of $23,835, legal costs of $30,745 primarily relatedto review of SEC filings and research related to compliance with providingrequested communications housed by the Company but not belonging to or directedto the Company, and maintenance and repair of $3,697. Significant otherdecreases during 2002 as compared to 2001 are as follows: officer salaries of$25,531 due to compensation reductions, office staff salaries of $10,480, in-house consultants of $6,495 due to a compensation reduction, automobile mileagereimbursement of $4,906, bad debt expense of $4,123, office utilities of $3,299due to improved conservation measures, bank service charges of $1,204 due toimproved cash positions and business and property taxes of $12,752 related toan adjustment to the real estate taxes of the investment in land.

 

The Companywill remain aggressive in decreasing general and administrative expenses ifadditional capital is not procured by decreasing again certain managementcompensation levels. Because certain employees received overdue compensationincreases during 2003, it may be necessary to significantly reduce or eliminatethe Company’s employee health benefits that are approximately $100,000 peryear. However, this action may cause certain employees to seek other employmentthat provides these benefits. Management must consider the benefits of being afully reporting Company in relation to the expense incurred. Without theprospect of near term profitability, this reporting and related expense may bedeferred until such time as the Company is in a financial position to absorbthe costs associated with this status.

 

**DEPRECIATION AND AMORTIZATION**

 

For the yearended December 31, 2002, depreciation and amortization expenses were $22,711which is a decrease from $28,323 for the year ended December 31, 2001. Thedecrease of $5,612 during 2002 is primarily due to the completed depreciationduring 2001of certain equipment. Prior to the year 2002, the Company classifiedamortization of software costs as an operating expense. During the year 2002,this expense of $293,585 was properly classified as a software sales and rentalcost of revenues and for the year 2001 this expense of $293,585 wasreclassified from an operating expense to a software sales and rental cost ofrevenues.

 

**INTEREST EXPENSE**

 

For the yearended December 31, 2001 interest expense was $140,855 which is an increase from$122,862 for the year ended December 31, 2001. The increase of $17,993 duringthe year 2002 as compared to the year 2001 is primarily attributable to areduction of $18,800 during 2001 of the interest provision related to payrolltax obligations.

 

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**GAIN FROM DEBT SETTLEMENT**

 

During theyear 2002, the Company successfully negotiated a settlement of an outstandingcreditor obligation that reduced the recorded obligation by $30,294.

 

**UNREALIZED LOSS - INVESTMENT IN LAND**

 

For the yearended December 31, 2002, the Company recorded a permanent dimunition of$127,300 in the carrying cost of the land held for investment to reflect theCompany’s asking sales price of $150,000, net of broker commissions.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

The Companyrequires additional capital to reorganize and refinance certain of its debtobligations. It continues to be difficult to obtain bank financing or otherpublic/private investment necessary. Our common stock is valued at $.01 atDecember 31, 2002 and with limited trading volume, it is highly unlikely thatthe Company will be able to access the equity markets. As a consequence, during2002, the Company failed to remit payroll obligations related to the second,third and fourth quarters of 2002. As of March 10, 2003, approximately $34,000of payroll tax obligations remain outstanding related to the year 2002.

 

For the yearended December, 31, 2002 the Company’s total liabilities of $2,941,353 (anincrease of $120,181 over 2001) exceed its total assets of $524,710. Inaddition, the Company’s current liabilities at December 31, 2002 of $1,363,894(a decrease of $105,938 from 2001) exceed current assets of $187,370 or aworking capital deficit of $1,176,524. This working capital deficit is primarily comprised of payroll taxobligations of $655,672 and accrued interest of $301,655. Payments towardsthese obligations for the most part is suspended due to the offer in compromiseproposal submitted to the Department of Treasury related to the payroll taxobligations (see above and below) and that $297,115 of the accrued interestbalance is primarily related to related parties. The Company has sustainedoperating losses for each of the past five years and has at December 31, 2002an accumulated deficit of $7,930,520. The Company has financed its operationsprimarily through debt financing provided by shareholders, officers andaffiliates as well as the failure to remit payroll tax obligations. At December31, 2002, the Company has a payroll tax obligation to the Internal RevenueService of $655,672. In accordance with a settlement agreement, the Company wasobligated to remit certain scheduled monthly payments and during the year 2001remitted payments of $165,000.  During2002, the Company submitted an offer in compromise to the Department ofTreasury to settle the outstanding obligation related to the years 1998, 1999,and 2000, and the previously negotiated settlement agreement payments aresuspended. The Company has offered a settlement proposal of twenty four monthlyinstallments of $12,500 as full payment of these years’ obligations. TheCompany believes that it will receive a favorable ruling from the InternalRevenue Service during 2003 regarding this issue. At December 31, 2002, andduring the first quarter of 2003 monthly operating expense and debt obligationscontinue to exceed monthly revenues. These liquidity issues resulted in theCompany’s auditor issuing a going concern opinion for the year ended December31, 2002.

 

During theyear 2002, the Company increased its total liabilities from $2,821,172 atDecember 31, 2001 to $2,941,353 at December 31, 2002. Current liabilities atDecember 31, 2002 are $1,363,894 which is a reduction of $105,938 from thecurrent liabilities of $1,469,832 at December 31, 2001. This reduction isprimarily a result of a decrease at December 31, 2002 of the following currentliabilities as compared to December 31, 2001: Current portion of convertibledebentures decreased $17,071; Current portion of notes payable to officers,shareholders and affiliates decreased $88,521; Current portion of long-term andcredit lines decreased $83,289; Accounts payable decreased $19,283; and Accruedexpenses decreased $22,267. Increases in current liabilities at December 31,2002 as compared to December 31, 2001 are as follows: Payroll tax obligationsincreased $56,069; Accrued interest increased $60,608 primarily due to anannual $50,000 accrued interest provision for an affiliate obligation of$500,000; and advances from officers and affiliates increased $7,816.

 

Total assetsat December 31, 2002 of $524,710 decreased $466,830 from the total assets atDecember 31, 2001 of $991,540. This decrease, as compared to 2001 balances, isprimarily due to the $293,585 annual amortization of capitalized softwaredevelopment costs related to the Company’s proprietary dietary software.Accounts receivable-trade at December 31, 2002 decreased $40,137; Prepaidexpenses and other current assets increased $2,684 and Property and Equipmentdecreased $17,287; and Land held for sale, net decreased $127,300 as a resultof an unrealized loss provision related to the permanent impairment of the fairmarket value of the land.

 

The Company’snet cash used in operating activities increased from a $14,856 cash used forthe year ended December 31, 2001 to a cash used of $81,914 for the year endedDecember 31, 2002. The Company’s net loss from operations of $934,458significantly increased for the year ended December 31, 2002 as compared to thenet loss from operations of $139,086 for the year 2001. During the year 2001,non cash items charged to operations were depreciation and amortization of$321,908, provision for bad debt of $16,756, common stock issued for employeecompensation of $31,955 and common stock issued with convertible debenture of$7,500. During the year 2002, non cash items charged to operations weredepreciation and amortization of $316,296; unrealized loss provision - landheld for sale of $127,300; provision for bad debt of $12,633; common stockissued for employee compensation of $19,705 and common stock issued forservices of $219,742 . Additional material cash flows from operations during2002 were: Accounts receivable - trade decreased $27,504 (increased $37,407 in2001); Accounts payable - trade decreased $19,283 (decreased $169,922 during2001); Payroll tax obligations increased $56,069 (decreased $138,745 during2001); Accrued expenses decreased $22,267 (decreased $26,677 during 2001); andDeferred Compensation increased $56,921 (increased $68,985 during 2001). Cashflows used in investing activities for the year ended December 31, 2002 was$5,424 ($19,184 during 2001), both years related to purchases of property andequipment. Cash flows provided by financing activities increased to $96,133 forthe year ended December 31, 2002 from $46,881 for the year ended December 31,2001. During the year 2002, the Company received $20,932 proceeds fromconvertible debentures ($116,410 during 2001); increased advances from officersand affiliates by $7,816 (decreased $22,571 during 2001); remitted payments onconvertible debentures of $1,805 ($27,270 during 2001); received proceeds fromnotes payable to officers, shareholders and affiliates of $25,000 ($48,570during 2001); remitted payments on notes payable to officers, shareholders andaffiliates of $83,723 ($18,630 during 2001); received proceeds from creditlines and long-term debt of $50,000 ($0 during 2001) remitted payments oncredit lines and long-term debt of $30,087 ($49,628 during 2001) and received$108,000 proceeds from the exercise of employee stock options.

 

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The netincrease in cash and cash equivalents for the year ended December 31, 2002 was$8,795 as compared to a net increase in cash and cash equivalents of $12,841for the year ended December 31, 2001.

 

The Companyhas financed its operations primarily through debt financing provided byshareholders, officers and affiliates, and deferment of payment of payroll taxobligations. The Company’s ability to sustain operations is dependent uponadditional investment capital or significant increases in revenues. The Companyhas limited cash and credit available and may not be able to raise additionalfinancing or establish lines of credit. Additional shareholder, officer andaffiliates debt financing also may not be available. The Company’s stock priceat December 31, 2002 of $.01 severely limits its access to capital from theequity markets. The Company is substantially reliant on alliances with threemajor food distributors and the termination of any one of these relationshipswould have a substantial immediate liquidity effect on the Company’s business.

 

Withoutfinancing, Management does believe that the Company can sustain operations byincreasing software sales and rental revenues. However, the Company may have toreduce salaries and/or suspend providing certain employee benefits, primarilyhealth insurance in order to meet its other operating obligations. This action,if taken, may result in the loss of certain key employees. It can not bedetermined whether the loss of any employees can be replaced in a timely mannerin order not to disrupt business. The Company believes that 2003 revenues willincrease over those of 2002, but this increase, if realized, may not besufficient to meet the Company’s outstanding obligations, including payroll taxobligations without a significant debt restructuring. Accordingly, theCompany’s auditor continues to issue a going concern opinion regarding theability of the Company to continue to sustain operations.

 

**ITEM 7****. FINANCIALSTATEMENTS (See Attached)**

 

**ITEM 8****. CHANGES INAND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

The Companyhas engaged the following Certified Public Accounting firm as its auditors: KBAGroup LLP 14160 Dallas Parkway, Ninth Floor, Dallas, Texas 75240. This firm isthe result of a merger of two accounting firms, one of which was the Company’sformer auditor, King Griffin & Adamson P.C. The Company filed an 8-K onMarch 7, 2003 as notification of this change, which was due to the accountant’sname change.

 

**PART III**

 

**ITEM 9****. DIRECTORS,EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS**

 

The Company’sExecutive Officers, Directors and Significant Management Consultants are asfollows:

 

C. ScottSykes, Jr. 63, Chairman of the Board and President, has over 30 yearsexperience in the health care industry. Mr. Sykes became associated with theCompany when, in January 1998, he bought a controlling interest in the Companyfrom the two co-founders. From 1994 until 1999, Mr. Sykes was “of counsel” tothe Chicago law firm of Gardner Carton and Douglas. From 1989 to 1994, Mr.Sykes was Senior Vice President and General Counsel of VHA, Inc., Irving,Texas, one of the country’s largest healthcare organizations. Mr. Sykesgraduated from The University of Virginia in 1962 with a B.A. and from that sameUniversity in 1965 with a LLB degree. Mr. Sykes is the largest shareholder inSureQuest Systems, Inc.

 

Stan Janczyk56, Chief Financial Officer, Treasurer and Secretary, was appointed ChiefFinancial Officer and Treasurer of the Company in March 2000. He was appointedSecretary in 2003. Prior to these offices, he maintained a financial consultingand tax practice, including serving as a consulting Chief Financial Officer tothe Company from 1998 to March 2000. He was President of a closely held marketingcompany in Dallas, Texas, serving in that capacity from 1995 to 2000. From 1993to 1995, he served as President of International Insurance Services, amulti-state insurance brokerage company in Dallas, Texas. From 1990 to 1993,Mr. Janczyk served as a financial consultant, specializing in the insuranceindustry. From 1980 to 1989, he was involved as a financial officer in the lifeand health insurance industry. He received his Certified Public Accountantcertificate in Illinois in 1976, having served as manager with the firm ofGrant Thornton in Chicago, Illinois and Oklahoma City, Oklahoma from 1974 to1979. He graduated from Indiana University in 1974, receiving a B.S. inBusiness.

 

Alma Sudderth47, Director, began her term as a Director in 1991. Ms. Sudderth is one of theco-founders of the Company. She has been employed by the company since 1989 andserved as a vice president until January 1998 when Mrs. Sudderth was namedPresident of the SureQuest Systems Inc., a Texas corporation and predecessor tothe Company. From January 2000 to the present, Ms. Sudderth serves as anIndustry Market Leader for the Company and heads the sales/marketing division,and is responsible for several of the Company’s significant strategicalliances. From February 1989 until January 1998, Ms. Sudderth was an ExecutiveVice-President of the Company. Ms. Sudderth is a Registered Dietitian. Shegraduated from the University of Tennessee in 1977 with a BS, majoring inDietetics and in 1978 with a Masters of Science, majoring in Food Science.

 

13

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**ITEM 10****. EXECUTIVECOMPENSATION**

 

The followingtable sets forth the compensation paid to certain executive officers of theregistrant for the three years ended December 31, 2002. Directors are not paidor reimbursed for attending meetings, other than out of pocket travel costs.

 

**SUMMARY COMPENSATION TABLE**

 
|                            |   | **ANNUAL  COMPENSATION** |   | **LONG TERM  COMPENSATION  AWARDS** |   |                   |   |
|---------------------------------|--------|--------------------------|--------|-------------------------------------|--------|------------------------|--------|
| **NAME AND PRINCIPAL POSITION** |   | **YEAR**                 |   | **SALARY**                          |   | **NUMBER OF  OPTIONS** |   | **ALL OTHER (1)  COMPENSATION** |   |
| C. Scott Sykes, Jr.,            |   | 2002                     |   | $                                   | 39,998 |                   | 0      |   | $ | 56,921 |   |
| Chairman and President          |   | 2001                     |   | $                                   | 31,015 |                   | 0      |   | 68,985 |   |
|                            |   | 2000                     |   | 0                                   |   | 0                      |   | 100,000 |   |
|                                 |        |                          |        |                                     |        |                        |        |  |  |  |  |

 

----

(1) Thestockholders of the Company approved an annual salary of $100,000 for Mr.Sykes, deferred portion of which he is permitted to convert into common stockof the Company at a conversion price equal to the closing price of the stock atthe last business day of the year in which the salary was due. During August2001, the Company began to compensate Mr. Sykes a monthly cash stipend of$6,666 that was terminated July 1, 2002 at which time he resumed his $8,333monthly deferred compensation. As of December 31, 2002, Mr. Sykes has the rightto convert the total amount of deferred compensation of $430,788 to 15,269,194shares of the Company’s common stock.

 

**ITEM 11****. SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF THE COMPANY**

 
| **BENEFICIAL OWNER**                  |   | **NUMBER OF SHARES OWNED** |   | **% OUTSTANDING** |   |
|---------------------------------------|--------|----------------------------|--------|-------------------|--------|
|                                  |   |                       |   |              |   |
| C. Scott Sykes, Jr.(1)                |   | 9,843,397                  |   | 23.8              | %      |
| Charles S. Sykes Irrevocable Trust(1) |   | 550,000                    |   | 1.3               | %      |
| Estate of Lois F. Sykes(1)            |   | 2,552,617                  |   | 6.2               | %      |
| Alma Sudderth(2)                      |   | 1,341,058                  |   | 3.3               | %      |
| Stan Janczyk                          |   | 919,324                    |   | 2.2               | %      |
| Public Ownership                      |   | 26,119,290                 |   | 63.2              | %      |
| As of December 31, 2002: TOTAL        |   | 41,325,686                 |   | 100.00            | %      |

 

----

(1) Mr. Sykesowns directly 1,960,548 shares of the Company’s common stock and indirectly7,822,849 shares through VIG Holdings, LLC, a limited liability company, whichas sole member, he beneficially controls. The Charles S. Sykes IrrevocableTrust was initiated by Mr. Sykes’ father’s Trust and is controlled by hismother, Kate F. Sykes, as trustee. All of the shares in the Estate of Lois F.Sykes are beneficially held on behalf of Mr. Sykes’ son.

 

(2) Number ofshares reflects those owned directly by Mr. and Ms. Sudderth and by all theirimmediate family members.

 

**ITEM 12****. CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS**

 

**RELATED PARTIES**

 

In June 1998the Charles S. Sykes Irrevocable Trust loaned to the Company the sum of$500,000. The Trust was given a secured promissory note for simple interest atthe rate of ten percent (10%) per annum with the principal and all accruedinterest due at maturity on January 1, 2001. The whole amount of the note issecured by the tangible and intangible personal property of the Company. TheTrust agreed to extend the maturity of the note to January 1, 2004.

 

Also inSeptember 1998, C. Scott Sykes, Jr. in order to reduce the cash flowrequirements of the Company, personally guaranteed certain indebtedness in thesum of $93,056 owed to Ms. Dianne Lindahl, a former Company employee and acurrent shareholder. As of December 31, 2002 the balance of the indebtedness is$43,435.

 

During theyear 2000, an officer of the Company assigned an automobile lease to theCompany for use by a Company employee. The Company incurred $1,540 expenserelated to this lease for the year ended December 31, 2001. The leaseterminated March 2001.

 

During theyear 2001, the Company issued to Mr. Sykes a $48,570 unsecured promissory notein exchange for $48,570. Terms of the note are monthly interest and principalpayments of $3,488 beginning January 20, 2002 with a final payment of $3,006 onMarch 20, 2003. The note bears a simple interest of 10%. The balance atDecember 31, 2002 is $16,551

 

During the year2002, the Company issued a $25,000 note bearing 12% to an affiliate of anemployee in exchange for $25,000. No interest or principal payments are dueuntil maturity. The note matures March 31, 2003.

 

**ITEM 13****. EXHIBITSAND REPORTS ON FORM 8-K**

 

(a)          Exhibits

 

2.1Information statement relating to the reincorporation in Delaware by the mergerof SureQuest Systems, Inc. (a Nevada corporation) into SureQuest Systems, Inc.(a Delaware corporation)

–                 incorporated by reference to SureQuestSystems, Inc.’s current report on Form Pre14c dated March 3, 2003.

 

4.1 2002 StockOption and Grant

–                 incorporated by reference to SureQuestSystems, Inc.’s current report on Form 8-K dated February 21, 2002 and relatedS-8 filing dated February 7,2002

 

16.1 Change inRegistrant’s Certifying Accountant

–                 incorporated by reference to SureQuestSystems, Inc. current report on Form 8-K dated March 7, 2003.

 

(b)         Reports on Form 8-K

 

On February 7,2002, the Company filed a S-8 Registration Statement with respect to theCompany’s Stock Option and Grant Plan. The S-8 Registration Statementauthorized the issuance of 5,000,000 common shares and the Plan wasincorporated in the 8-K filing dated February 21, 2002.

 

On March 7,2003, the Company filed an 8-K as notification of a change in the Registrant’sCertifying Accountant due to a merger by the predecessor Accountant and aresultant name change.

 

Certifications

 

Certification as to review of the December 31, 2001 and 2002accompanying annual financial statements by C. Scott Sykes, Jr., ChiefExecutive Officer

 

Certification as to review of the December 31, 2001 and 2002accompanying annual financial statements by Stanley Janczyk, Chief FinancialOfficer

 

99.1Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section906 of the Sarbanes-Oxley Act of 2002.

 

99.2Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant toSection 906 of the Sarbanes-Oxley Act of 2002.

 

14

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**ITEM 14****. CONTROLSAND PROCEDURES**

 

Within 90 daysprior to the date of this report, we carried out an evaluation, under thesupervision and with the participation of our principal executive officer andprincipal financial officer, of the effectiveness of the design and operationof our disclosure controls and procedures. Based on this evaluation, ourprincipal executive officer and principal financial officer concluded that ourdisclosure controls and procedures are effective in timely alerting them tomaterial information required to be included in our periodic SEC reports. Itshould be noted that the design of any system of controls is based in part uponcertain assumptions about the likelihood of future events, and there can be noassurance that any design will succeed in achieving its stated goals under allpotential future conditions, regardless of how remote.

 

In addition,there have been no significant changes in our internal controls or in otherfactors that could significantly affect those controls subsequent to the dateof their last evaluation.

 

**SIGNATURES**

 

In accordancewith the requirements of the Securities Act of 1933, the registrant certifiesthat it has reasonable grounds to believe that it meets all of the requirementsfor filing on this Form 10KSB and authorize this registration statement to besigned on its behalf by the undersigned, thereunto duly authorized, in the cityof Dallas, State of Texas on March 31, 2003.

 

**SureQuest Systems, Inc., a Nevada Corporation**

 
|                   | **(Registrant)** |                             |
|------------------------|------------------|----------------------------------|
|                   |             |                             |
|                   |             |                             |   |
| *Date March 31,  2003* | *By*             | */s/ C. Scott Sykes,  Jr.*       |   |
|                   |             | *C. Scott Sykes,  Jr. President* |   |
|                   |             |
|                   | *By*             | */s/ Stan Janczyk*               |   |
|                   |             | *Stan Janczyk, CFO*              |   |

 

15

----

 

(1)          Print the name and title of the signingofficer under his or her signature.

 

Certifications

 

I, C.Scott Sykes, Jr. certify that:

 

1.             I have reviewedthis annual report on Form 10-KSB of SureQuest Systems, Inc. and Subsidiaries;

 

2.             Based on myknowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report;

 

3.             Based on myknowledge, the financial statements, and other financial information includedin this annual report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this annual report;

 

4.             The registrant’sother certifying officers and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in SecuritiesExchange Act Rules 13a-14 and 15d-14) for the registrant and have:

 

(a)                                  designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this annual report is being prepared; 

 

(b)                                 evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

 

(c)                                  presented inthis annual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.             The registrant’sother certifying officers and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee of registrant’sboard of directors (or persons performing the equivalent function):

 

(a)                                  allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

(b)                                 any fraud,whether or not material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.             The registrant’sother certifying officers and I have indicated in this annual report whether ornot there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 

Date: March 31, 2003

 
|   | /s/ C.Scott Sykes, Jr.  |   |
|--------|-------------------------|--------|
|   | C.Scott Sykes, Jr.      |
|   | Chief Executive Officer |

 

16

----

 

I, Stanley Janczyk, certify that:

 

1.             I have reviewedthis annual report on Form 10-KSB of SureQuest Systems, Inc., and Subsidiaries;

 

2.             Based on myknowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report;

 

3.             Based on myknowledge, the financial statements, and other financial information includedin this annual report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this annual report;

 

4.             The registrant’sother certifying officers and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in SecuritiesExchange Act Rules 13a-14 and 15d-14) for the registrant and have:

 

(a)                                  designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this annual report is being prepared;

 

(b)                                 evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

 

(c)                                  presented inthis annual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date; 

 

5.             The registrant’sother certifying officers and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

(a)                                  allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

(b)                                 any fraud,whether or not material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.             The registrant’sother certifying officers and I have indicated in this annual report whether ornot there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 

Date: March 31, 2003

 
|   | /s/ Stanley Janczyk     |
|--------|-------------------------|
|   | Stanley Janczyk         |
|   | Chief Financial Officer |

 

17

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**SUREQUEST SYSTEMS,INC. AND SUBSIDIARIES**

** **

**CONSOLIDATEDFINANCIAL STATEMENTS AND**

 

**REPORT OF INDEPENDENTCERTIFIED PUBLIC ACCOUNTANTS**

 

**FOR YEARS ENDEDDECEMBER 31, 2002 and 2001**

 

----

 

**TABLE OF CONTENTS**

 

 

REPORT OF INDEPENDENT CERTIFIED PUBLICACCOUNTANTS

 

FINANCIALSTATEMENTS

 
| Consolidated Balance Sheets                                      |
|------------------------------------------------------------------|
| Consolidated Statements of Operations                            |
| Consolidated Statement of Changes in  Shareholders’ Deficit |
| Consolidated Statements of Cash Flows.                           |
| Notes to Consolidated Financial Statements                       |

 

F-1

----

 

**REPORT OF INDEPENDENT CERTIFIED PUBLICACCOUNTANTS**

 

**To the Board of Directors and Stockholders**

 

of SureQuestSystems, Inc.

 

We haveaudited the accompanying consolidated balance sheets of SureQuest Systems, Inc.and subsidiaries as of December 31, 2002 and 2001 and the related consolidatedstatements of operations, changes in shareholders’ deficit and cash flows forthe years then ended. These consolidated financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these consolidated financial statements based on our audits.

 

We conductedour audits in accordance with auditing standards generally accepted in theUnited States. Those standards require that we plan and perform the audits toobtain reasonable assurance about whether the consolidated financial statementsare free of material misstatement. An audit includes examining, on a testbasis, evidence supporting amounts and disclosures in the consolidatedfinancial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

 

In ouropinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of SureQuest Systems,Inc. and subsidiaries as of December 31, 2002 and 2001 and the results of theiroperations and their cash flows for the years then ended in conformity withaccounting principles generally accepted in the United States.

 

As describedin Note 3, the accompanying consolidated financial statements have beenprepared assuming that the Company will continue as a going concern. TheCompany has experienced losses of $934,458 and $139,086 for 2002 and 2001,respectively. Additionally, at December 31, 2002, the Company’s currentliabilities exceeded its current assets by $1,176,524 and its total liabilitiesexceeded its total assets by $2,416,643. At December 31, 2002, totalliabilities include $655,672 of payroll tax obligations and related penaltiesand interest relating to 1998 and 1999, the first quarter of 2000 and thesecond, third and fourth quarters of 2002. These conditions raise substantialdoubt about the Company’s ability to continue as a going concern. Unless theCompany increases cash flows from operations or obtains additional financing,it will not be able to meet its obligations as they come due and it will beunable to execute its long-term business plan. Management’s plans as theyrelate to these issues are also explained in Note 3. The consolidated financialstatements do not include any adjustments that might result from the outcome ofthis uncertainty.

 
| **KBA GROUP LLP** |
|-------------------|
|              |
| Dallas,  Texas    |
|              |
| March 10,  2003   |

 

F-2

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**SUREQUEST SYSTEMS,INC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

 

**ASSETS**

 
|                                                                                                                                               |   | **DECEMBER 31,  2002** |    | **DECEMBER 31,  2001** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|---------|------------------------|--------|
|                                                                                                                                               |   |                   |    |                   |   |
| CURRENT ASSETS                                                                                                                                     |   |                   |    |                   |   |
| Cash and cash equivalents                                                                                                                          |   | $                      | 25,380  |                   | $      | 16,585 |   |
| Accounts receivable – trade, less allowance for doubtful accounts of  $25,897 and $25,142 at December 31, 2002 and 2001, respectively         |   | 146,356                |    | 186,493                |   |
| Prepaid expenses and other current assets                                                                                                          |   | 15,634                 |    | 12,950                 |   |
| Total current assets                                                                                                                               |   | 187,370                |    | 216,028                |   |
|                                                                                                                                               |   |                   |    |                   |   |
| PROPERTY AND EQUIPMENT                                                                                                                             |   |                   |    |                   |   |
| Computer equipment                                                                                                                                 |   | 181,669                |    | 178,492                |   |
| Office furniture and fixtures                                                                                                                      |   | 13,871                 |    | 13,871                 |   |
| Office and other equipment                                                                                                                         |   | 44,911                 |    | 42,664                 |   |
| Leasehold improvements                                                                                                                             |   | 62,357                 |    | 62,357                 |   |
|                                                                                                                                               |   | 302,808                |    | 297,384                |   |
| Less: accumulated depreciation and amortization                                                                                                    |   | (256,160               | )       | (233,449               | )      |
| Net property and equipment                                                                                                                         |   | 46,648                 |    | 63,935                 |   |
|                                                                                                                                               |   |                   |    |                   |   |
| OTHER ASSETS                                                                                                                                       |   |                   |    |                   |   |
|                                                                                                                                               |   |                   |    |                   |   |
| Land held for sale, net                                                                                                                            |   | 150,000                |    | 277,300                |   |
| Capitalized software development costs, net of accumulated  amortization of $1,907,495 and $1,613,909 at December 31, 2002 and 2001,  respectively |   | 134,561                |    | 428,146                |   |
| Other                                                                                                                                              |   | 6,131                  |    | 6,131                  |   |
| Total other assets                                                                                                                                 |   | 290,692                |    | 711,577                |   |
|                                                                                                                                               |   |                   |    |                   |   |
| TOTAL ASSETS                                                                                                                                       |   | $                      | 524,710 |                   | $      | 991,540 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

F-3

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**SUREQUEST SYSTEMS,INC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCESHEETS**

 

**LIABILITIES AND SHAREHOLDERS’DEFICIT**

 
|                                                                                                                                                              |   | **DECEMBER 31,  2002** |    | **DECEMBER 31,  2001** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|---------|------------------------|--------|
| CURRENT LIABILITIES                                                                                                                                               |   |                   |    |                   |   |
| Current portion of convertible debentures                                                                                                                         |   | $                      | 11,932  |                   | $      | 29,003 |   |
| Current portion of notes payable to officers, shareholders and  affiliates                                                                                        |   | 111,098                |    | 199,619                |   |
| Current portion of long-term debt and credit lines                                                                                                                |   | 60,215                 |    | 143,504                |   |
| Accounts payable – trade                                                                                                                                     |   | 177,044                |    | 196,327                |   |
| Payroll tax obligations                                                                                                                                           |   | 655,672                |    | 599,603                |   |
| Accrued expenses                                                                                                                                                  |   | 38,462                 |    | 60,729                 |   |
| Accrued interest                                                                                                                                                  |   | 301,655                |    | 241,047                |   |
| Advances from officers and affiliates                                                                                                                             |   | 7,816                  |    | —                 |   |
| Total current liabilities                                                                                                                                         |   | 1,363,894              |    | 1,469,832              |   |
|                                                                                                                                                              |   |                   |    |                   |   |
| CONVERTIBLE DEBENTURES, net of current portion                                                                                                                    |   | 219,638                |    | 183,440                |   |
| NOTES PAYABLE TO OFFICERS, SHAREHOLDERS AND AFFILIATES, net of  current portion                                                                                   |   | 808,707                |    | 778,909                |   |
| LONG-TERM DEBT, net of current portion                                                                                                                            |   | 118,326                |    | 15,124                 |   |
| DEFERRED COMPENSATION                                                                                                                                             |   | 430,788                |    | 373,867                |   |
| Total liabilities                                                                                                                                                 |   | 2,941,353              |    | 2,821,172              |   |
|                                                                                                                                                              |   |                   |    |                   |   |
| COMMITMENTS AND CONTINGENCIES (Notes 3 and 12)                                                                                                                    |   | —                 |    | —                 |   |
|                                                                                                                                                              |   |                   |    |                   |   |
| SHAREHOLDERS’ DEFICIT                                                                                                                                        |   |                   |    |                   |   |
| Preferred Stock – $.001 par value, 1,000,000 shares authorized, none  issued and outstanding                                                                 |   | —                 |    | —                 |   |
| Common Stock – $.001 par value, 50,000,000 shares authorized,  41,325,686 and 35,880,840 issued and outstanding at December 31, 2002 and  2001, respectively |   | 41,326                 |    | 35,881                 |   |
| Additional paid-in capital                                                                                                                                        |   | 5,472,551              |    | 5,130,549              |   |
| Accumulated deficit                                                                                                                                               |   | (7,930,520             | )       | (6,996,062             | )      |
| Total shareholders’ deficit                                                                                                                                  |   | (2,416,643             | )       | (1,829,632             | )      |
|                                                                                                                                                              |   |                   |    |                   |   |
| TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT                                                                                                                  |   | $                      | 524,710 |                   | $      | 991,540 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

F-4

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**SUREQUEST SYSTEMS,INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

 
|                                                                               |   | **YEAR ENDED  DECEMBER 31,  2002** |     | **YEAR ENDED  DECEMBER 31,  2001** |   |
|------------------------------------------------------------------------------------|--------|------------------------------------|----------|------------------------------------|--------|
| Revenues                                                                           |   |                               |     |                               |   |
| Dietary services and supplies                                                      |   | $                                  | 567,865  |                               | $      | 592,760 |   |
| Software sales and rental                                                          |   | 635,408                            |     | 995,722                            |   |
| Total revenues                                                                     |   | 1,203,273                          |     | 1,588,482                          |   |
|                                                                               |   |                               |     |                               |   |
| Cost of revenues                                                                   |   |                               |     |                               |   |
| Dietary services and supplies                                                      |   | 199,533                            |     | 212,169                            |   |
| Software sales and rental                                                          |   | 474,537                            |     | 490,103                            |   |
| Total cost of revenues                                                             |   | 674,070                            |     | 702,272                            |   |
| Gross profit                                                                       |   | 529,203                            |     | 886,210                            |   |
|                                                                               |   |                               |     |                               |   |
| Operating expenses                                                                 |   |                               |     |                               |   |
| Sales and marketing                                                                |   | 53,917                             |     | 69,740                             |   |
| General and administrative                                                         |   | 1,141,346                          |     | 800,562                            |   |
| Depreciation and amortization                                                      |   | 22,711                             |     | 28,323                             |   |
| Total operating expenses                                                           |   | 1,217,974                          |     | 898,625                            |   |
|                                                                               |   |                               |     |                               |   |
| Loss from operations                                                               |   | (688,771                           | )        | (12,415                            | )      |
|                                                                               |   |                               |     |                               |   |
| Other income (expense)                                                             |   |                               |     |                               |   |
| Interest expense                                                                   |   | (140,855                           | )        | (122,862                           | )      |
| Tax penalties                                                                      |   | (7,826                             | )        | (3,182                             | )      |
| Gain from debt settlement                                                          |   | 30,294                             |     | —                             |   |
| Unrealized loss on land held for sale                                              |   | (127,300                           | )        | —                             |   |
| Other, net                                                                         |   | —                             |     | (627                               | )      |
| Total other expense, net                                                           |   | (245,687                           | )        | (126,671                           | )      |
| Net loss before income tax provision                                               |   | (934,458                           | )        | (139,086                           | )      |
|                                                                               |   |                               |     |                               |   |
| Income tax provision                                                               |   | —                             |     | —                             |   |
| Net loss                                                                           |   | $                                  | (934,458 | )                                  | $      | (139,086 | ) |
|                                                                               |   |                               |     |                               |   |
| Basic and diluted net loss per weighted average share of common stock  outstanding |   | $                                  | (0.02    | )                                  | $      | (0.00 | ) |
|                                                                               |   |                               |     |                               |   |
| Weighted average number of shares of basic and diluted common stock  outstanding   |   | 39,720,572                         |     | 34,135,800                         |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

F-5

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**SUREQUEST SYSTEMS,INC.**

**CONSOLIDATED STATEMENT OF CHANGES INSHAREHOLDERS’ DEFICIT**

 
|                                                                       |   | **Number  of Issued  Shares** |   | **Common  Stock  Amount** |   | **Additional  Paid-In  Capital** |   | **Total  Accumulated  Deficit** |   | **Shareholders’  Deficit** |       |
|----------------------------------------------------------------------------|--------|-------------------------------|--------|---------------------------|--------|----------------------------------|--------|---------------------------------|--------|---------------------------------|------------|
| Balance at January 1, 2001                                                 |   | 32,407,257                    |   | $                         | 32,407 |                             | $      | 5,094,568                       |   | $                               | (6,856,976 | ) | $ | (1,730,001 | ) |
|                                                                       |   |                          |   |                      |   |                             |   |                            |   |                            |       |
| Common stock issued as compensation                                        |   | 1,597,201                     |   | 1,597                     |   | 30,358                           |   | —                          |   | 31,955                          |       |
| Common stock issued with convertible debenture                             |   | 250,000                       |   | 250                       |   | 7,250                            |   | —                          |   | 7,500                           |       |
| Common stock cancelled                                                     |   | (190,833                      | )      | (190                      | )      | 190                              |   | —                          |   | —                          |       |
| Common stock issued in conjunction with debt covenant terms (see note  15) |   | 1,817,215                     |   | 1,817                     |   | (1,817                           | )      | —                          |   | —                          |       |
| Net loss for year                                                          |   |                          |   |                      |   |                             |   | (139,086                        | )      | (139,086                        | )          |
| Balance at December 31, 2001                                               |   | 35,880,840                    |   | 35,881                    |   | 5,130,549                        |   | (6,996,062                      | )      | (1,829,632                      | )          |
|                                                                       |   |                          |   |                      |   |                             |   |                            |   |                            |       |
| Common stock issued as compensation                                        |   | 679,000                       |   | 679                       |   | 19,026                           |   | —                          |   | 19,705                          |       |
| Common stock issued as payment for consulting services                     |   | 4,015,846                     |   | 4,016                     |   | 215,726                          |   | —                          |   | 219,742                         |       |
| Common stock options exercised                                             |   | 750,000                       |   | 750                       |   | 107,250                          |   | —                          |   | 108,000                         |       |
| Net loss for year                                                          |   |                          |   |                      |   |                             |   | (934,458                        | )      | (934,458                        | )          |
|                                                                       |   |                          |   |                      |   |                             |   |                            |   |                            |       |
| Balance at December 31, 2002                                               |   | 41,325,686                    |   | $                         | 41,326 |                             | $      | 5,472,551                       |   | $                               | (7,930,520 | ) | $ | (2,416,643 | ) |

 

Theaccompanying notes are an integral part of this consolidated financialstatement.

 

F-6

----

 

**SUREQUEST SYSTEMS,INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

 

 
|                                                                        |   | **YEAR  ENDED  DECEMBER 31,2002** |     | **YEAR  ENDED  DECEMBER 31,2001** |   |
|-----------------------------------------------------------------------------|--------|-----------------------------------|----------|-----------------------------------|--------|
| CASH FLOWS FROM OPERATING ACTIVITIES                                        |   |                              |     |                              |   |
| Net loss                                                                    |   | $                                 | (934,458 | )                                 | $      | (139,086 | ) |
| Adjustments to reconcile net loss to net cash used in operating  activities |   |                              |     |                              |   |
| Depreciation and amortization                                               |   | 22,711                            |     | 28,323                            |   |
| Amortization of software expense                                            |   | 293,585                           |     | 293,585                           |   |
| Unrealized loss on land held for sale                                       |   | 127,300                           |     | —                            |   |
| Provision for bad debt                                                      |   | 12,633                            |     | 16,756                            |   |
| Common stock issued as employee compensation                                |   | 19,705                            |     | 31,955                            |   |
| Common stock issued for services                                            |   | 219,742                           |     | —                            |   |
| Common stock issued with convertible debentures                             |   | —                            |     | 7,500                             |   |
| (Increase) decrease in                                                      |   |                              |     |                              |   |
| Accounts receivable – trade                                            |   | 27,504                            |     | (37,407                           | )      |
| Prepaid expenses and other current assets                                   |   | (2,684                            | )        | (1,321                            | )      |
| Other assets                                                                |   | —                            |     | 1,596                             |   |
| Increase (decrease) in                                                      |   |                              |     |                              |   |
| Accounts payable – trade                                               |   | (19,283                           | )        | (169,922                          | )      |
| Payroll tax obligations                                                     |   | 56,069                            |     | (138,745                          | )      |
| Accrued expenses                                                            |   | (22,267                           | )        | (26,677                           | )      |
| Accrued interest                                                            |   | 60,608                            |     | 49,602                            |   |
| Deferred compensation                                                       |   | 56,921                            |     | 68,985                            |   |
| NET CASH USED IN OPERATING ACTIVITIES                                       |   | (81,914                           | )        | (14,856                           | )      |
|                                                                        |   |                              |     |                              |   |
| CASH FLOWS FROM INVESTING ACTIVITIES                                        |   |                              |     |                              |   |
| Purchases of property and equipment                                         |   | (5,424                            | )        | (19,184                           | )      |
|                                                                        |   |                              |     |                              |   |
| CASH FLOWS FROM FINANCING ACTIVITIES                                        |   |                              |     |                              |   |
| Net increase (decrease)in advances from officers and affiliates             |   | 7,816                             |     | (22,571                           | )      |
| Proceeds from convertible debentures                                        |   | 20,932                            |     | 116,410                           |   |
| Payments on convertible debentures                                          |   | (1,805                            | )        | (27,270                           | )      |
| Proceeds from notes payable to officers, shareholders and affiliates        |   | 25,000                            |     | 48,570                            |   |
| Payments on notes payable to officers, shareholders and affiliates          |   | (83,723                           | )        | (18,630                           | )      |
| Proceeds from credit lines and long-term debt                               |   | 50,000                            |     | —                            |   |
| Payments on credit lines and long-term debt                                 |   | (30,087                           | )        | (49,628                           | )      |
| Proceeds from stock options exercised                                       |   | 108,000                           |     | —                            |   |
| NET CASH PROVIDED BY FINANCING ACTIVITIES                                   |   | 96,133                            |     | 46,881                            |   |
|                                                                        |   |                              |     |                              |   |
| NET INCREASE IN CASH AND CASH EQUIVALENTS                                   |   | 8,795                             |     | 12,841                            |   |
|                                                                        |   |                              |     |                              |   |
| Cash and cash equivalents at beginning of year                              |   | 16,585                            |     | 3,744                             |   |
|                                                                        |   |                              |     |                              |   |
| Cash and cash equivalents at end of year                                    |   | $                                 | 25,380   |                              | $      | 16,585 |   |
|                                                                        |   |                              |     |                              |   |
| SUPPLEMENTAL DISCLOSURES OF INTEREST AND INCOME TAXES PAID                  |   |                              |     |                              |   |
|                                                                        |   |                              |     |                              |   |
| Interest paid on borrowings                                                 |   | $                                 | 80,000   |                              | $      | 73,000 |   |
| Income taxes paid                                                           |   | $                                 | —   |                              | $      | — |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

F-7

----

 

**SUREQUEST SYSTEMS,INC. AND SUBSIDIARIES**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**DECEMBER 31, 2002 AND2001**

 

**NOTE 1 - BACKGROUND AND ORGANIZATION**

 

SureQuestSystems, Inc., is a publicly traded company, and was incorporated under thelaws of the State of Nevada on August 19, 1941. SureQuest Systems, Inc. is inthe business of providing dietary services, supplies and consulting, anddeveloping and selling dietary proprietary management software products.Primary customers include hospitals, nursing homes and assisted livingfacilities in the United States and Canada.

 

**NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES**

 

**Principles of Consolidation**

 

The financialstatements include the accounts of SureQuest Systems, Inc. and its wholly-ownedsubsidiaries, collectively referred to as “the Company”. All significantinter-company transactions have been eliminated.

 

**Cash and Cash Equivalents**

 

For Statementof Cash Flows purposes, the Company considers all cash in banks, certificatesof deposit and other highly-liquid investments with maturities of three monthsor less when purchased to be cash and cash equivalents.

 

**Accounts Receivable and Revenue Recognition**

 

The Company’srevenue recognition policies are consistent with the American Institute ofCertified Public Accountant’s Statement of Position (SOP) 97-2, softwarerevenue recognition, and SOP 98-9 which is a modification of SOP 97-2 and theSecurities and Exchange Commission (SEC) Staff Accounting Bulletin No. 101(“SAB 101”), “Revenue Recognition”. SAB 101 summarizes certain aspects of theSEC’s views in applying generally accepted accounting principles to revenuerecognition in financial statements. Revenue is recognized at the time services are performed or goods areshipped, except for revenue from software licenses purchased by “private label”distributors, which is recognized when payment is received due to theuncertainties of the customer commitment. Certain of the Company’s customersoperate under the terms of thirty day open ended rental agreements cancelableby either party with thirty days notice. In the normal course of business, theCompany extends unsecured credit to virtually all of its rental and menu formcustomers. The Company provides for an allowance for bad debt for thoseaccounts considered doubtful of collection.

 

F-8

----

 

**Property and Equipment**

 

Property andequipment is recorded at cost and is depreciated on a straight-line basis, overthe estimated useful life (generally 3 to 10 years) of the respective asset.Major additions and betterments are capitalized and depreciated over theremaining estimated useful life of the related assets. Maintenance, repairs,and minor improvements are charged to expense as incurred. Depreciation expensefor the years ended December 31, 2002 and 2001 was $9,901 and $15,513,respectively. Leasehold improvements are capitalized and amortized over theshorter of the life of the improvement or the remaining life of the lease.Amortization expense for the years ended December 31, 2002 and 2001 related toleasehold improvements is $12,810 and $12,810, respectively.

 

**Capitalized Software Costs**

 

The Companyclassifies the costs of planning, designing and establishing the technologicalfeasibility of a computer software product as research and development costsand charges these costs to expense when incurred. After technologicalfeasibility has been established, i.e. the Company has a working model in use,costs of producing a marketable product and product masters are capitalized andamortized on a product-by-product basis using the straight-line method over theestimated life of the product (5 years). Subsequent software updates andmodifications are expensed as incurred. Quarterly, the Company evaluates therecoverability of the carrying value of the capitalized software costs bycomparing the unamortized capitalized costs to the net realized value, asdetermined by an undiscounted cash flow analysis. The amount by which thecarrying value exceeds the net realizable value, if any, is written off. Costof maintenance and customer support is charged to expense as incurred. During2002 the Company has reclassified the presentation of “amortization of softwareexpense” from an operating expense to “software sales and rental” cost ofrevenues. Accordingly, this reclassification was also applied to theaccompanying 2001operating statement that increased “software sales and rental”cost of revenues by $293,585 with an accompanying reduction of depreciation andamortization expense by the same amount.

 

**Long-Lived Assets**

 

The Companyaccounts for the impairment and disposition of long-lived assets in accordancewith Statement of Financial Accounting Standards (SFAS) No. 144, “Accountingfor the Impairment or Disposal of Long-Lived Assets”.  In accordance with SFAS No. 144, long-lived assets are reviewedfor events or changes in circumstances which indicate that their carrying valuemay not be recoverable. These evaluations include comparing the futureundiscounted cash flows of such assets to their carrying value. If the carryingvalue exceeds the future undiscounted cash flows, the assets are written downto their fair value. During the year 2002, the Company had determined thatthere was a permanent decline in the carrying value of the land held for sale.Accordingly, the Company recognized a $127,300 unrealized loss in theConsolidated Statement of Operations for the year ended December 31, 2002 toreflect the land’s revised estimated fair market value of $150,000.

 

F-9

----

 

**Income Taxes**

 

The Companyutilizes the asset and liability approach to financial accounting and reportingfor income taxes. Deferred income tax assets and liabilities are computedannually for differences between the financial statements and tax basis of assetsand liabilities that will result in taxable or deductible amounts in the futurebased on enacted tax laws and rates applicable to the periods in which thedifferences are expected to affect taxable income. Valuation allowances areestablished when necessary to reduce deferred tax assets to the amount expectedto be realized. Income tax expense or benefit is the tax payable or refundablefor the period plus or minus the change during the period in deferred taxassets and liabilities.

 

**Use of Estimates and Assumptions**

 

Thepreparation of financial statements in conformity with generally acceptedaccounting principles requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period.Actual results could vary from the estimates that were used.

 

**Loss Per Share**

 

Basic loss pershare is computed by dividing consolidated net loss by the weighted averagenumber of shares of common stock outstanding during the year. The common stockequivalents are not included in the diluted loss per share for 2002 and 2001 asthey are antidilutive.

 

**Stock-Based Compensation**

 

The Companyaccounts for stock-based employee compensation arrangements in accordance withprovisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accountingfor Stock Issued to Employees”.  UnderAPB Opinion No. 25, compensation expense for employees is based on the excess,if any, on the date of grant, of the fair value of the Company’s stock over theexercise price.  Had the Companydetermined compensation based on the fair value at the grant date for its stockoptions under SFAS 123, "Accounting for Stock-Based Compensation," asamended by SFAS No. 148, "Accounting for Stock-BasedCompensation-Transition and Disclosure-An Amendment of FASB Statement No.123," the net loss and loss per share would not have significantlydiffered from reported net loss.

 

The Companyaccounts for equity instruments issued to non-employees in accordance with theprovisions of SFAS No. 123 as amended by SFAS No. 148 and Emerging Issues TaskForce Issue No. 96-18, “Accounting for Equity Instruments That Are Issued toOther Than Employees for Acquiring, or in Conjunction with Selling, Goods orServices.” All transactions in which goods or services are the considerationreceived for the issuance of equity instruments are accounted for based on thefair value of the consideration received or the fair value of the equityinstrument issued, whichever is more reliably measurable. The measurement dateof the fair value of the equity instrument issued is the earlier of the date onwhich the counterparty’s performance is complete or the date on which it isprobable that performance will occur.

 

**Recent Accounting Pronouncement**

 

In December2002, the FASB issued SFAS 148, “Accounting for Stock-BasedCompensation-Transition and Disclosure,” which amends SFAS 123, “Accounting forStock-Based Compensation.” SFAS 148 provides alternative methods of transitionfor a voluntary change to the fair value based method of accounting forstock-based employee compensation. In addition, SFAS 148 amends the disclosurerequirements of SFAS 123 to require more prominent disclosures in both annualand interim financial statements about the method of accounting for stock-based compensation and the effect of the method used on reporting results. SFAS148 is effective for fiscal years ending after December 15, 2002. The Companyhas adopted the disclosure requirements of SFAS No. 148 and the adoption ofthis standard had no material effect on the Company’s financial position, cashflows or results of operations.

 

**Reclassifications**

 

Certain 2001amounts have been reclassified to conform to 2002 presentation.

 

**NOTE 3 - GOING CONCERN UNCERTAINTY**

 

Theconsolidated financial statements have been prepared on the assumption that theCompany will continue as a going concern. The Company sustained net losses of$934,458 and $139,086 during the years ended December 31, 2002 and 2001,respectively and cash used by operating activities for the same periodsaggregated $81,914 and $14,856, respectively. Additionally, current liabilitiesat December 31, 2002 of $1,363,894 exceed current assets of $187,370 and totalliabilities at December 31, 2002 of $2,941,353 exceed total assets of $524,710.The Company’s continued existence depends upon the success of management’sefforts to raise additional capital necessary to meet the Company’s obligationsas they come due and to increase market penetration to increase revenues.  The Company intends to obtain capitalprimarily through debt financing. There can be no degree of assurance giventhat the Company will be successful in obtaining additional financing or thatthe Company will increase revenues to be profitable in the near future.

 

F-10

----

 

Theconsolidated financial statements do not include any adjustments to reflect thepossible effects on the recoverability and classification of assets orclassification of liabilities which may result from the inability of theCompany to continue as a going concern.

 

**NOTE 4 - CAPITALIZED SOFTWARE COSTS**

 

The Companyhas two software packages, a DOS based package that was developed internally,and a Windows based package that was purchased during 1998. The DOS package isprimarily targeted to customers interested in more simple dietary applicationsand prefer monthly rental agreement payment terms. The Windows based packageoffers single and multi-user versions and is primarily the product of choicefor the Company’s product and services distribution alliances. The DOS packagewas fully amortized at December 31, 2000. Amortization expense related to theWindows package is $293,585 for each of the years 2002 and 2001.

 

F-11

----

 

**NOTE 5 - CONVERTIBLE DEBENTURES**

 

During 2001and during October 2002, the Company extended terms of two debentures. Thefirst debenture was issued during 2001 and bears annual interest of 10%.Extended terms of repayment include monthly interest only payments of $780through August 2003. Beginning September 2003 and payable each month thereafterfor a period of 58 months, the Company will remit monthly principal andinterest payments of $1,986 and a final payment of $1,990 on August 1,2008.  During 2001, the holder wasissued 250,000 common shares and warrants to purchase 125,000 common shares at$.04 per share that originally expired February 28, 2003 which term wasextended to February 27, 2005. This debenture is secured by the Company’saccounts receivable.  The principalbalance of this debenture at December 31, 2002 is $93,640 and includescapitalized interest of $9,622. The second debenture is unsecured and bearsinterest of 11%. As additional consideration, during 2001 the holder wasgranted warrants to acquire 1,252,386 common shares ranging from $.04 to $.075per share. These warrants initially expired January 20, 2003 and were extendedduring September 2002 to October 2004. The principal balance of $137,930 at December 31, 2002 includescapitalized interest during 2002 of $11,310. Terms of repayment include monthlyonly interest payments of $1,264 through August 2003. Beginning September 2003,and for 59 months thereafter, the Company will remit equal payments of $2,999.This debenture is payable on demand in the event that the Company securesinvestment capital equal to or in excess of $3,000,000.

 
|                                        |   | **2002** |    | **2001** |   |
|---------------------------------------------|--------|----------|---------|----------|--------|
| Total convertible debentures                |   | $        | 231,570 |     | $      | 212,443 |   |
|                                        |   |     |    |     |   |
| Less current maturities                     |   | 11,932   |    | 29,003   |   |
| Long term obligation-convertible debentures |   | $        | 219,638 |     | $      | 183,440 |   |

 

Principalmaturities of convertible debentures are as follows at December 31, 2002:

 

| **Year**   |   |   |    |
|------------|--------|--------|---------|
| 2003       |   | $      | 11,932  |   |
| 2004       |   | 38,418 |    |
| 2005       |   | 42,691 |    |
| 2006       |   | 47,440 |    |
| 2007       |   | 52,720 |    |
| Thereafter |   | 38,369 |    |
|       |   | $      | 231,570 |   |

 

**NOTE 6 - NOTES PAYABLE TO OFFICERS,SHAREHOLDERS & AFFILIATES**

 
|                                                                                                                                                                                             |   | **2002** |   | **2001** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|
| Unsecured promissory note payable to shareholder affiliate; interest  at 10% per annum; monthly principal and interest of $1,785 beginning June  2002 with final monthly payment due April 2008. |   | $        | 89,308 |     | $      | 97,136 |   |
|                                                                                                                                                                                             |   |     |   |     |   |
| Unsecured promissory note payable to shareholder affiliate; interest  payable semi-annually at 8% per annum; principal payable on demand                                                         |   | 10,000   |   | 10,000   |   |
|                                                                                                                                                                                             |   |     |   |     |   |
| Unsecured demand promissory note payable to shareholder; interest  payable at 10% per annum; principal payable on demand                                                                         |   | 12,801   |   | 14,107   |   |
|                                                                                                                                                                                                  |        |          |        |          |        |  |  |

 

F-12

----

 

**NOTE 6 - NOTES PAYABLE TO OFFICERS,SHAREHOLDERS & AFFILIATES**

 

 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   | **2002** |    | **2001** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|---------|----------|--------|
| Unsecured promissory note to affiliate; interest at 10% per annum;  monthly installment of principal and interest of $806; repaid in full during  May 2002                                                                                                                                                                                                                                                                                                                                                                                                                      |   | —   |    | 3,934    |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |     |    |     |   |
| Promissory note to shareholder affiliate; interest at 10% per annum  with total accrued interest and principal payable on demand; security  interest in all assets of the Company subordinated to certain banks and  shareholders holding prioritized liens; shareholder affiliate has verbal  agreement not to demand redemption during the year 2003                                                                                                                                                                                                                          |   | 500,000  |    | 500,000  |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |     |    |     |   |
| Promissory note to shareholder; 100,000 shares of the Company stock  held in escrow as security; interest to accrue through March 10, 2004 at 10%;  $1,785 monthly payment on April 10, 2004 followed by 205 $3,000 monthly  payments thereafter; in addition, holder will be repaid at 3% of monthly cash  proceeds in excess of $130,000; cash proceeds shall include gross receipts  from operations, net proceeds from equity or debt funding, and/or net  proceeds from sales of certain assets; payment to be made on tenth day of  month following month of cash receipt |   | 222,711  |    | 222,711  |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |     |    |     |   |
| Promissory note to shareholder with personal guarantee by Company  officer; secured by software source code and subordinated lien on land;  interest at 7.5% monthly with a monthly interest and principal payment of  $3,000 beginning January 2, 2002, six monthly interest and principal payments  of $4,500 beginning February 10, 2002; thereafter $3,000 monthly interest and  principal payments with a final payment of $1,215 on April 10, 2004                                                                                                                        |   | 43,434   |    | 82,070   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |     |    |     |   |
| Unsecured promissory note to shareholder/officer; interest at 10% per  annum payable in monthly principal and interest payments of $3,488 beginning  January 20,2002 with final payment of $3,006 on March 20, 2003                                                                                                                                                                                                                                                                                                                                                             |   | 16,551   |    | 48,570   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |     |    |     |   |
| Unsecured promissory note to shareholder/affiliate; interest at 12%  per annum; principal and accrued interest payable on March 31, 2003                                                                                                                                                                                                                                                                                                                                                                                                                                        |   | 25,000   |    | —   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |     |    |     |   |
| Total notes payable to officers, shareholders and affiliates                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   | 919,805  |    | 978,528  |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |     |    |     |   |
| Less current portion                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   | 111,098  |    | 199,619  |   |
| Long-term portion                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   | $        | 808,707 |     | $      | 778,909 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |        |          |         |          |        |  |  |

 

 

Principalmaturities of notes payable to officers, shareholders, and affiliates are asfollows at December 31, 2002:

 

| **Year**   |   | **Principal Amount** |    |
|------------|--------|----------------------|---------|
| 2003       |   | $                    | 111,098 |   |
| 2004       |   | 524,217              |    |
| 2005       |   | 15,961               |    |
| 2006       |   | 17,633               |    |
| 2007       |   | 19,479               |    |
| Thereafter |   | 231,417              |    |
| TOTAL      |   | $                    | 919,805 |   |

 

F-13

----

 

**NOTE 7 - CREDIT LINES AND LONG-TERM DEBT**

 
|                                                                                                                                                                                                                                                                                                                                  |   | **2002** |    | **2001** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|---------|----------|--------|
| $21,300 revolving credit line with bank secured by personal guarantee  of a shareholder; minimum monthly payments of 2% of the outstanding principal;  interest at 24.98% per annum                                                                                                                                                   |   | $        | 14,733  |     | $      | 15,310 |   |
|                                                                                                                                                                                                                                                                                                                                  |   |     |    |     |   |
| Revolving credit line with bank secured by the personal guarantee of  a shareholder; minimum monthly payments of 2% of the outstanding principal;  interest at 16.24% per annum                                                                                                                                                       |   | 6,094    |    | 6,877    |   |
|                                                                                                                                                                                                                                                                                                                                  |   |     |    |     |   |
| Revolving credit line with bank secured by the personal guarantee of  an affiliate; interest at 18.32% per annum                                                                                                                                                                                                                      |   | 540      |    | 1,346    |   |
|                                                                                                                                                                                                                                                                                                                                  |   |     |    |     |   |
| Promissory note to a bank; secured by land held for sale; quarterly  payments of interest only at 9.75% per annum through February 25, 2003 and  8.75% per annum thereafter; quarterly principal and interest payments of  $2,500 beginning May 25, 2003 with a final principal and interest payment of  $87,528 on February 25, 2004 |   | 87,500   |    | 87,500   |   |
|                                                                                                                                                                                                                                                                                                                                  |   |     |    |     |   |
| Note payable to a bank; collateralized by the Company’s receivables,  inventory and equipment; interest at prime plus 2.75% (7% at December 31,  2002); payable in monthly installments of principal and interest of $836;  matures May 2003                                                                                     |   | 4,103    |    | 13,421   |   |
|                                                                                                                                                                                                                                                                                                                                  |   |     |    |     |   |
| Note payable to bank; unsecured; interest at 10% per annum; payable  in monthly installments of principal and interest of $810; matures November  2003                                                                                                                                                                                |   | 9,052    |    | 17,392   |   |
|                                                                                                                                                                                                                                                                                                                                  |   |     |    |     |   |
| Unsecured promissory note to office lessee for purpose of leasehold  improvements; interest at 11% per annum; payable in monthly installments of  principal and interest of $484; matures July 2003                                                                                                                                   |   | 3,264    |    | 6,782    |   |
|                                                                                                                                                                                                                                                                                                                                  |   |     |    |     |   |
| Unsecured promissory note; 10% interest; payable on demand                                                                                                                                                                                                                                                                            |   | 3,255    |    | 10,000   |   |
|                                                                                                                                                                                                                                                                                                                                  |   |     |    |     |   |
| Unsecured promissory note; 12% interest; payable in quarterly  principal and interest installments of $7,500 beginning April 2003 with final  payment due January 2005 of $5,556                                                                                                                                                      |   | 50,000   |    | —   |   |
|                                                                                                                                                                                                                                                                                                                                  |   |     |    |     |   |
| Total long-term debt                                                                                                                                                                                                                                                                                                                  |   | 178,541  |    | 158,628  |   |
|                                                                                                                                                                                                                                                                                                                                  |   |     |    |     |   |
| Less current maturities                                                                                                                                                                                                                                                                                                               |   | 60,215   |    | 143,504  |   |
|                                                                                                                                                                                                                                                                                                                                  |   |     |    |     |   |
| Long-term portion                                                                                                                                                                                                                                                                                                                     |   | $        | 118,326 |     | $      | 15,124 |   |

 

 

Principalmaturities of credit lines and long-term debt are as follows at December 31,2002:

 

| **Year** |   |    |    |
|----------|--------|---------|---------|
| 2003     |   | $       | 60,215  |   |
| 2004     |   | 112,932 |    |
| 2005     |   | 5,394   |    |
|     |   | $       | 178,541 |   |

 

F-14

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**NOTE 8 - DEFERRED COMPENSATION**

 

Deferredcompensation relates to salaries accrued for a certain officer, not yet paid.This amount is convertible into common stock of the Company determined on thelast business day of each respective year. At December 31, 2002 and 2001, theofficer could have elected to convert the deferred compensation obligationoutstanding of $430,788 and $373,867, respectively to 15,269,194 and 10,525,694common shares, respectively. This obligation is recorded as a long-termliability based on the Company’s ability to repay and the officer’s intent tocollect.

 

**NOTE 9 - FAIR VALUE OF FINANCIAL INSTRUMENTS**

 

Statement ofFinancial Accounting Standards No. 107 “Disclosure About Fair Value ofFinancial Instruments”, requires disclosure about the fair value of allfinancial assets and liabilities for which it is practicable to estimate. AtDecember 31, 2002 and 2001 the carrying value all of the Company’s accountsreceivable, accounts payable and accrued liabilities approximate fair valuebecause of their short term nature. Convertible debentures, credit lines, notespayable and long-term debt carrying values approximate fair values based on theborrowing rates currently available to the Company for loans with similar terms.

 

F-15

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**NOTE 10 - PAYROLL TAX OBLIGATIONS AND INCOMETAXES**

 

The Companyhad not remitted Federal and State employer and employee payroll taxes for theyears 1998 and 1999 and for the first quarter of 2000. On January 12, 2001, theDepartment of Treasury notified the Company that the total obligation due as ofthat date was $720,975, which includes penalty and interest. Although theCompany believes that it has meritorious defenses to abate the assessed penalty,the Company recorded the $720,975 obligation at December 31, 2000. Prior tothis notice, the Company entered into a settlement agreement with theDepartment of Treasury that provided for certain installment payments. During2000 and 2001 the Company remitted $165,000 as payments towards thisobligation. On September 20, 2001, the Company submitted to the Department ofTreasury an offer in compromise that proposed a $300,000 settlement of theentire obligation payable in 24 equal monthly installments of $12,500. Althoughmanagement believes that the offer related to the 1998, 1999 and 2000obligations will be accepted in an amount significantly below the recordedobligation, there can be no assurance that the offer will be accepted. TheCompany has not recorded additional penalties and interest related to the 1998,1999 and 2000 obligations and the liability recorded at December 31, 2002 is$655,672. The $655,672 recorded at December 31, 2002 includes approximately$60,000 of 2002 obligations not yet remitted. On November 12, 2001, theDepartment of Treasury provided notice that the total liability, as of thatdate that includes additional penalty and interest is $734,438. The Company hasnot increased its provision from the amount of $720,975 recorded at December31, 2000, because management believes that an amount less than that recorded atDecember 31, 2002 will be compromised with the Department of Treasury.  During the first quarter of 2003, theInternal Revenue Service completed its field valuation of the Company’s assetsand liabilities and a notice from the Department of Treasury regardingdetermination of the offer and compromise is expected by the Company during thesecond quarter of 2003. The Company has remitted all payroll tax obligations forthe year 2001. During 2003, the Company has remitted $25,000 of 2002obligations outstanding at December 31, 2002, however, as of March 10, 2003,the Company has not remitted payroll tax deposits of $34,220 related to thethird and fourth quarters of 2002. In order for the Company to be eligible forthe offer and compromise, it must be current with all obligations subsequent tothe periods of the offer.

 

**NOTE 11 - INCOME TAXES**

 

Deferred taxassets and liabilities at December 31, 2002 and 2001 consist of the following:

 
|                           |   | **2002**   |   | **2001**   |   |
|--------------------------------|--------|------------|--------|------------|--------|
| Current deferred tax asset     |   | $          | 14,913 |       | $      | 8,548 |   |
| Non-Current deferred tax asset |   | 1,408,532  |   | 1,180,824  |   |
| Valuation allowance            |   | (1,423,445 | )      | (1,189,372 | )      |
| Net deferred tax asset         |   | $          | — |       | $      | — |   |

 

F-16

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**NOTE 11 - INCOME TAXES - CONTINUED**

 

The currentdeferred tax asset results from the allowance for doubtful accounts. Thenon-current deferred tax asset results from the unrealized losses on land heldfor sale, the deferred compensation, and the net tax operating loss carryforward of approximately $3,483,000 at December 31, 2002 that begins to expirein 2012. At December 31, 2002 and 2001 the net deferred tax asset has a 100%valuation allowance due to the uncertainty of the Company generating futuretaxable income.

 

The Company’sincome tax benefit for the years ended December 31, 2002 and 2001 differed fromthe statutory federal rate of 34% as follows:

 
|                                                                                    |   | **2002** |     | **2001** |   |
|-----------------------------------------------------------------------------------------|--------|----------|----------|----------|--------|
| Statutory rate applied to loss before income taxes                                      |   | $        | (317,716 | )        | $      | (47,320 | ) |
| Increase in income taxes resulting from amounts not deductible for  income tax purposes |   | 89,058   |     | 78,656   |   |
| Change in previous years estimate                                                       |   | (5,415   | )        | 120,997  |   |
| Increase (decrease) in valuation allowance                                              |   | 234,073  |     | (152,333 | )      |
| Income tax benefit                                                                      |   | $        | —   |     | $      | — |   |

 

**NOTE 12 - COMMITMENTS AND CONTINGENCIES**

 

The Companyhas operating leases for its office facilities, automobiles, and certainequipment. Rental expense for operating leases was $77,224 and $84,361 for 2002and 2001, respectively. Future minimum rental commitments under non cancelableleases for the succeeding five years are as follows:

 

| **Year ended  December 31,** |   | **Amount** |   |
|------------------------------|--------|------------|--------|
| 2003                         |   | $          | 42,851 |   |
| 2004                         |   | 10,749     |   |
| 2005                         |   | 5,411      |   |
| 2006                         |   | 2,406      |   |
|                         |   | $          | 61,417 |   |

 

The Companymay be subject to legal proceedings and claims that arise in the ordinarycourse of business. Management currently believes that resolving thesematter(s), if any, will not have a material adverse impairment on the Company’sfinancial position or its results of operations.

 

**NOTE 13 - COMMON STOCK ISSUED IN CONJUNCTIONWITH DEBT COVENANT**

 

In March 2000,a promissory note to a third party was converted to the Company’s common stock.Terms of the conversion provided that the Company guaranteed that the Companyshares conveyed would have a minimum per share value of $.20 per share at March8, 2001 or the Company would issue additional common shares in order that thetotal number of shares conveyed at inception of this agreement and theadditional shares obligated to be issued at March 8, 2001 at the closing shareprice on that date would equal $66,667. The Company’s share price at March 8,2001 was $0.031, therefore the Company issued an additional 1,817,215 sharesduring 2001.

 

F-17

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**NOTE 14 - SIGNIFICANT DISTRIBUTORS**

 

During each ofthe years 2002 and 2001 approximately 54% of total revenues are attributable tothree distributors that represent the Company through private label softwareproducts and menu services. During 2001 the three distributors accounted for30%, 22% and 2%, respectively, of the Company’s total revenues. During 2002these three distributors accounted for 28%, 20% and 6%, respectively, of theCompany’s total revenues.

 

F-18

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**NOTE 15 - STOCK OPTIONS AND WARRANTS**

 

The estimatedweighted average grant date fair value of the options granted during 2002 usingthe Black-Scholes Model was $0. The fair value of each option grant isestimated on the date of grant using the Black-Scholes option-pricing modelwith the following assumptions used for grants in 2002: dividend yield of 0percent; expected volatility of 103%; risk free interest rate of 3%; and anexpected life of 1 day as the options were exercised on the same day as granted.

 

A summary ofchanges in the Company’s compensatory options follows:

 

 
|                             |   | **Employee Stock Options** |   | **Other Stock Options/Warrants**       |   | **Combined Total**     |       |
|----------------------------------|--------|----------------------------|--------|----------------------------------------|--------|------------------------|------------|
|                             |   | **Options**                |   | **Weighted  Average  Exercise  Price** |   | **Options/  Warrants** |       | **Weighted  Average  Exercise  Price** |   | **Options/  Warrants** |   |
| Outstanding at January 1, 2001   |   | 200,000                    |   | $                                      | .15    |                   | 1,770,096  |   | $ | .16 |   | 1,970,096 |   |
|                             |   |                       |   |                                   |   |                   |       |   |   |   |   |
| Granted                          |   | —                     |   | —                                 |   | 1,427,386              |       | .06 |   | 1,427,386 |   |
| Exercised                        |   | —                     |   | —                                 |   | —                 |       | — |   | — |   |
| Expired                          |   | —                     |   | —                                 |   | (962,096               | )          | .06 |   | (962,096 | ) |
| Outstanding at December 31, 2001 |   | 200,000                    |   | $                                      | .15    |                   | 2,235,386  |   | $ | .10 |   | 2,435,386 |   |
|                             |   |                       |   |                                   |   |                   |       |   |   |   |   |
| Granted                          |   | 750,000                    |   | $                                      | .15    |                   | 1,577,386  |   | $ | .05 |   | 2,327,386 |   |
| Exercised                        |   | (750,000                   | )      | $                                      | .15    |                   | —     |   | — |   | (750,000 | ) |
| Expired                          |   | (200,000                   | )      | $                                      | .15    |                   | (2,235,386 | ) | $ | .10 |   | (2,435,386 | ) |
| Outstanding at December 31, 2002 |   | —                     |   | —                                 |   | 1,577,386              |       | $ | .05 |   | 1,577,386 |   |

 

The followingtable summarizes information about stock options/warrants outstanding atDecember 31, 2002:

 
| **Options and Warrants Outstanding** |   | **Options Exercisable** |   |
|--------------------------------------|--------|-------------------------|--------|
| **Range of  exercise prices**        |   | **Number  outstanding** |   | **Weighted  Average  remaining  contractual life** |   | **Weighted  average  exercise price** |   | **Number  Exercisable** |   | **Weighted average  exercise price** |   |   |
| $ .04-$.08                           |   | 1,577,386               |   | 1.6 years |   | $ | .05 |   | 1,577,386 |   | $ | .05 |   |   |
|                                      |        |                         |        |  |  |  |  |  |  |  |  |  |  |  |  |

 

The otherstock options were issued with convertible debentures and for servicesperformed in 2002 and 2001.

 

F-19

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**NOTE 16 - RELATED PARTY TRANSACTIONS**

 

Certainofficers/shareholders and affiliates of the Company have provided debt fundingto the Company. Terms of the debt obligations are described in Note 6 in theaccompanying consolidated financial statements. Accrued interest related tothese obligations is $297,115 and $232,813 at December 31, 2002 and 2001.Interest expense related to these obligations is $94,338 and $95,309 for theyears ended December 31, 2002 and 2001, respectively, and interest paid torelated parties is $30,036 and $16,861 for the years ended December 31, 2002and 2001, respectively.

 

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**NOTE 17 - SEGMENT INFORMATION**

 

SurequestSystems, Inc. has two reportable segments: Dietary Services and Supplies andSoftware Sales and Rental. The Dietary Services and Supplies segment providesmenu services that consist of hard copy menus to its customers. The SoftwareSales and Rental segment provides sales and rental of its proprietary dietarysoftware, installation services, technical support to the user and relatedpaper products.

 

The accountingpolicies of the segments are the same as described in the summary ofsignificant accounting policies. Assets of the segment groups are not relevantfor management of the business nor for disclosure. Amortization of theproprietary software is allocated to the software sales and rental segmentonly.  Amortization - software for theyear ended has been reclassified from the prior year presentation. Interestexpense is allocated on the lines of segment revenue provided. Income taxes, ifany, and other unusual items are not allocated.

 

Eachrespective segment is managed separately and requires different strategic andmarketing efforts.

 

Revenues fromthe Software Sales and Rental segment include sales from Canada of $74,857 and$29,778 for the years ended December 31, 2002 and 2001, respectively. All otherrevenues are from U.S. operations.

 

**Segment Loss Allocation**

 

 
| **Year Ended  December 31,** |   | **Dietary  Services and  Supplies** |    | **Software  Sales and  Rental** |   | **Total** |   |
|------------------------------|--------|-------------------------------------|---------|---------------------------------|--------|-----------|--------|
| 2002                         |   |                                |    |                            |   |      |   |
|                         |   |                                |    |                            |   |      |   |
| Revenue                      |   | $                                   | 567,865 |                            | $      | 635,408   |   | $ | 1,203,273 |   |
|                         |   |                                |    |                            |   |      |   |
| Interest Expense             |   | 66,474                              |    | 74,381                          |   | 140,855   |   |
|                         |   |                                |    |                            |   |      |   |
| Amortization – software |   | —                              |    | 293,585                         |   | 293,585   |   |
|                         |   |                                |    |                            |   |      |   |
| Segment loss                 |   | (245,728                            | )       | (591,724                        | )      | (837,452  | )      |
|                         |   |                                |    |                            |   |      |   |
| 2001                         |   |                                |    |                            |   |      |   |
|                         |   |                                |    |                            |   |      |   |
| Revenue                      |   | $                                   | 592,760 |                            | $      | 995,722   |   | $ | 1,588,482 |   |
|                         |   |                                |    |                            |   |      |   |
| Interest Expense             |   | 45,847                              |    | 77,015                          |   | 122,862   |   |
|                         |   |                                |    |                            |   |      |   |
| Amortization – software |   | —                              |    | 293,585                         |   | 293,585   |   |
|                         |   |                                |    |                            |   |      |   |
| Segment loss                 |   | (10,661                             | )       | (128,425                        | )      | (139,086  | )      |

 
| **Segment  Loss Reconciliation**   |   | **2002** |     | **2001** |   |
|------------------------------------|--------|----------|----------|----------|--------|
| Total loss for reportable segments |   | $        | (837,452 | )        | $      | (139,086 | ) |
|                               |   |     |     |     |   |
| Unallocated amounts:               |   |     |     |     |   |
| Unrealized loss-land               |   | (127,300 | )        | —   |   |
| Debt settlement                    |   | 30,294   |     |     |   |
| Net loss                           |   | $        | (934,458 | )        | $      | (139,086 | ) |

 

F-21

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**NOTE 18 - SUBSEQUENT EVENT**

 

On January 24,2003, the Company’s Board of Directors adopted resolutions to authorize acorporate restructuring, including moving its state of incorporation fromNevada to Delaware. The Board determined that this restructuring is in the bestinterests of the Company and its shareholders. A preliminary draft of the 14CInformation Statement, describing the transaction, was filed with theSecurities and Exchange Commission on March 3, 2003. The restructuringcontemplates, among other things, the issuance of a Series A ConvertiblePreferred Stock convertible into Delaware common stock, the right of theshareholders not receiving the Series A Convertible Preferred Stock to receiveone share of Delaware common stock for each forty shares of Nevada common stockand the adoption of a 2003 Directors, Officers and Consultants stock option,stock warrant and stock award plan. It is contemplated that, upon completion ofthe restructuring, the Company will enter into consulting agreements providingfor the issuance of approximately 6,750,000 shares of registered common stockand warrants to acquire registered common stock at exercise prices ranging from$.002 to $.50 per share. If all of these warrants are exercised, the Companywill receive approximately $500,000 in additional capital for its corporatepurposes. The cost to the Company of the 6,750,000 shares cannot be determinedat this time but will be calculated at the fair market value of the shares asdetermined using the closing trading price at the award date.

 

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